Memorandum Office of Jenine Windeshausen Treasurer-Tax Collector

To: The Board of Supervisors From: Jenine Windeshausen, Treasurer-Tax Collector Date: October 27, 2020 Subject: Securitization

Action Requested a) Adopt a resolution consenting to the issuance and sale by the California County Tobacco Securitization Agency not to exceed $67,000,000 initial principal amount of tobacco settlement bonds (Gold Country Settlement Funding Corporation) Series 2020 Bonds in one or series and other related matters; authorizing the execution and delivery by the county of a certificate of the county; and authorizing the execution and delivery of and approval of other related documents and actions in connection therewith. b) Direct that eligible proceeds from the Series 2020 Bonds be expended on infrastructure improvements at the Placer County Government Center, construction of the Health and Human Services Building and other Board approved capital facilities projects.

Background October 6, 2020 Board of Supervisors Meeting Summary. Your Board received an update regarding the County’s prior tobacco securitizations and information on the potential to refund the Series 2006 Bonds to receive additional proceeds for capital projects. Based on that update, the Board requested the Treasurer to return to the Board on October 27, 2020 with a resolution approving documents and other matters to proceed with refunding the Series 2006 Bonds.

In summary from the October 6, 2020 meeting, the County receives annual payments in perpetuity from the 1998 Master Settlement Agreement (MSA). The MSA payments are derived from a percentage of sales.

Placer County issued bonds in 2002 and 2006 to securitize a share of its MSA payments. Securitization is the sale of a future stream of revenue in exchange for a lump sum. The County used proceeds from the sale of the 2002 securitization in the amount of $41.59 million to construct the Community Development and Resource Agency building. In 2006, the County used proceeds to pay- off the remaining balance on the 2002 bonds and to take out an additional $13.56 million which was used to help pay for the construction of the South Placer Justice Center Courthouse.

At the October 6, 2020 Board meeting it was stated that to address requirements of the MSA and federal tax laws, tobacco securitizations require loans and agreements between three primary entities: 1. the County, 2. the California County Tobacco Securitization Agency, a statewide joint power authority (JPA), utilized by nine counties for tobacco securitization, and 3. the Gold Country Settlement Funding Corporation, a Placer County formed single-purpose, non-profit corporation.

151 Placer County Board of Supervisors October 27, 2020 Page 2 of 4

The securitization structure involves agreements between these entities to further satisfy requirements of the MSA and federal tax laws. Attachment A, Tobacco Securitization Transaction Structure & Flow of Funds shows the relationship between the three primary entities and the primary documents that tie the entities together, and the related flow of funds.

It was also indicated at the October 6, 2020 Board meeting that pursuant to federal tax laws, tobacco bond proceeds must be spent on capital facilities to avoid having to place the funds in an endowment with limitations on the withdrawal of funds. It was further noted the County Executive has recommended utilizing the proceeds for infrastructure improvements at the Placer County Government Center, construction of the Health and Human Services Building and other Board approved capital facilities projects.

Adoption of Resolution Today. Your Board is requested to adopt a resolution approving and authorizing certain actions and documents necessary to effectuate the securitization:

1) Consent to the issuance and sale of the Series 2020 bonds by the California Tobacco Securitization Agency: a) in an amount not to exceed $67 million, b) at an interest rate not to exceed 5.00%, c) with a maturity date no later than June 1, 2060.

2) Approve the draft Preliminary Offering Circular in substantially the final form (Attachment D): Preliminary Official Statement (DRAFT), with additions and changes recommended or approved by County Counsel or by Authorized Officers.

3) Authorize actions necessary for the partial refunding of Prior Bonds in the event a full refunding is not practicable, and the County is better served by a partial refunding, and authorizes the Authorized Officers to take certain actions related to: a) Amendments to the Prior Loan Agreement, b) Amendments to the Prior Indenture, c) Amendments to the Declaration and Agreement of Trust dated June 1, 2002 (the “Trust Agreement”).

4) Approve the Certificate of the County and authorize the Chair of the Board, the County Executive Officer, the Treasurer-Tax Collector, or their designees (“Authorized Officers”) to execute and deliver the Certificate of the County which: a) Outlines the structure of the Series 2020 Bonds as described in the indentures, and provides the proceeds will be for the following purposes: i) refund and defease all the County’s outstanding tobacco bonds, ii) fund the liquidity reserve required by the Indenture, iii) fund capital improvements of the County, iv) pay costs of issuance. b) Provides the Series 2020 Bonds will be sold pursuant to a Contract of Purchase with Stifel Nicolaus & Company, Incorporated (the “Underwriter”). c) Certifies the County: i) is duly organized and authorized to take the actions necessary to enter into the Series 2020 Bond transactions pursuant to the related documents and agreements, ii) is not in conflict with or breach of any requirements under agreements related to the MSA,

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iii) does not require any other consent or authority to enter into the Series 2020 Bond transactions, iv) is not a party to any litigation which would have an effect on the enforceability of the MSA and related agreements (except as may be disclosed in the Offering Circular), v) is not in breach of or in default of any law or regulation which would have a materially adverse impact on the County’s ability to perform its obligations related to the Series 2020 Bonds, vi) that after reasonable investigation that the County’s representations and warranties related to the Series 2020 Bonds are true and correct in all material respects, vii) agrees to preserve the tax-exempt status of the Series 2020 Bonds.

The resolution further provides for the Board’s authorization for the Authorized Officers to take the actions necessary to consummate the 2020 Tobacco Bonds, and to confirm and approve all actions taken by County officers, employees and agents to date.

Preliminary Offering Circular. The Preliminary Offering Circular is the primary disclosure document. The County must exercise reasonable care to avoid material misstatements or omissions in preparing public statements, including the Preliminary Offering Circular, which are used to sell or tender for securities in primary offerings, and it may not knowingly or recklessly include material misstatements or misleading statements in other public statements while its securities are outstanding.

The distribution of the Preliminary Offering Circular by the County is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the Preliminary Offering Circular to include all facts that would be material to an investor in the Obligations. Material information is information where there is a substantial likelihood it would have actual significance in the deliberations of the reasonable investor when deciding whether to buy, sell or hold the Obligations. If the County Board of Supervisors concludes that the Preliminary Offering Circular includes all facts that would be material to an investor in the Obligations, it must adopt a resolution that authorizes staff to execute a certificate to the effect that the Preliminary Offering Circular has been “deemed final.”

The Securities and Exchange Commission (the “SEC”), the agency with regulatory authority over the County’s compliance with the federal securities laws, has issued guidance as to the duties of the County Board of Supervisors with respect to its approval of the Preliminary Offering Circular. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761 / January 24, 1996) (the “Release”), the SEC stated that if a member of the County Board of Supervisors has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the Obligations, whether relating to their repayment, tax-exempt status, undisclosed conflicts of interest with interested parties, or otherwise, he or she should endeavor to discover whether such facts are adequately disclosed in the Preliminary Offering Circular. In the Release, the SEC stated that the steps that a member of the County Board of Supervisors could take include becoming familiar with the Preliminary Offering Circular and questioning staff and consultants about the disclosure of such facts.

Direct Expenditure of Eligible Proceeds. Your Board is requested to direct eligible proceeds from the Series 2020 Bonds be expended on infrastructure improvements at the Placer County Government Center, construction of the Health and Human Services Building and other Board approved capital

153 Placer County Board of Supervisors October 27, 2020 Page 4 of 4 facilities projects. The County Executive has recommended using the proposed 2020 Tobacco Refunding Bond proceeds for DeWitt Center infrastructure, including sewer, water, and roadway improvements and the Health and Human Services Building. Additionally, the Board approved a reimbursement resolution (Res. No. 2019-217) which allows the County to reimburse itself for project expenses made 30 days prior to the resolution through the time of bond issuance for the HHS Building, Crime Lab and Tahoe Justice Center. Other projects approved by your Board will also be included in the list of projects eligible for bond proceeds to ensure that all bond proceeds will be utilized. Additionally, it is recommended your Board direct eligible proceeds from the Series 2020 Bonds be spent on any Board approved projects, provide financial flexibility and to ensure all eligible proceeds can be spent on County capital projects should project feasibility, priorities or other circumstances change.

Fiscal Impact It is currently estimated the Series 2020 Bonds will yield between $3.5 million and $5 million in proceeds for County capital projects. At any time, up until the award of bonds, the County may choose not to proceed with the issuance of the Series 2020 Bonds, should it be determined it is no longer in the interest of the County to do so. In that event, the County will have incurred approximately $252,000 in non-contingent costs related to the proposed issuance of the Series 2020 Bonds.

Attachments • Attachment A: Tobacco Securitization Transaction Structure & Flow of Funds • Attachment B: Resolution Consenting to the Issuance and Sale by the California County Tobacco Securitization Agency of Bonds in the Not to Exceed Amount of $65,000,000 • Attachment C: Form of the Certificate of the County of Placer (DRAFT) • Attachment D: Preliminary Offering Circular (DRAFT)

154 Bond Investors Provides lump sum payment for bonds in exchange for annual debt service payments Transactions

Refunding Bond Purchase Annual Bond Agreement & Bond Debt Service Lump Sum Official Statement Proceeds* Payments Agency sells stream of MSA Payments (securitizes MSA California County Tobacco Securitization Agency ( Agency ) Payments ) through Issues bonds & then loans proceeds to corporation . M akes annual debt service payments to issuance of bonds bond holders from MSA Payments passed through from Corporation *Note: A portion of bond proceeds will be used to Agency Corporation pay-off outstanding balance of prior bonds. makes Lump repays Agency Sum Loan to Loan from MSA Loan Corporation Payment Agreement from Bond Stream Proceeds Agency loans bond proceeds to Corporation

Gold Country Settlement Funding Corporation (Single-purpose, Non-profit “Corporation”) Borrows bond proceeds from Agency and uses proceeds to purchase MSA Revenues from County. Makes annual repayments to Agency from MSA Payments received from AG.

Corporation uses Corporation uses County notices Agency loan proceeds Lump Sum Loan Attorney General to purchase MSA Proceeds to (AG) of sale of MSA payments from County purchase MSA Escrow Payment Stream & Payments Agreement directs AG to send future MSA payments to Trustee MSA Payments = Master Settlement for benefit of Corporation Agreement Annual Payments made by Participating Manufacturers (Tobacco Companies) to and Placer County distributed by Attorney General as Sells and assigns future MSA Payments to Corporation in exchange for loan proceeds. required by 1998 lawsuit settlement. County uses lump sum proceeds from sale of MSA Payment for capital projects. 155

Primary Document List

Agency Resolution – Provides authorization of Agency for sale of bonds and loan of bond proceeds to Agency

Corporation Resolution – Provide authorization of Corporation to borrow bond proceeds from Agency and authorizaion of Corporation to use loan proceeds to purchase MSA payments from County.

County Resoution – Provides authorization of County to sell MSA payments to Agency for lump sum derived from Loan from Agency. Further provides authorization to direct Attorney General to send future MSA Payments to Trustee for benefit of Corporation.

Indenture/Supplemental Indenture – Provides: • Agency direction to Trustee of obligations to receive MSA Payments for benefit of Corporation. and further • for Trustee to use Corporation revenues (MSA Payments) to repay Agency, and thence • to utlize Agency Revenues (MSA Payments) to make debt service payments to bondholders.

Escrow Agreement – Provides direction from Agency to Trustee regarding use of bond proceeds to defease (pay-off) prior bonds.

Loan Agreement – Agreement for Agency loan of bond proceeds to Corporation

Bond Purchase Agreement – Agreement between Agency and Underwriter regarding purchase/sale of bonds by underwriter

Official Statement – Primary disclosure document to meet Securities and Exchange Commission disclosure requirements, also used as informational tool for marketing of bonds.

156 Before the Board of Supervisors County of Placer, State of California

Resolution No.: ______

In the matter of: RESOLUTION OF THE BOARD OF SUPERVISORS OF THE COUNTY OF PLACER CONSENTING TO THE ISSUANCE AND SALE BY THE CALIFORNIA COUNTY TOBACCO SECURITIZATION AGENCY OF NOT TO EXCEED $67,000,000 INITIAL PRINCIPAL AMOUNT OF TOBACCO SETTLEMENT BONDS (GOLD COUNTRY SETTLEMENT FUNDING CORPORATION), SERIES 2020 IN ONE OR MORE SERIES AND OTHER RELATED MATTERS; AUTHORIZING THE EXECUTION AND DELIVERY BY THE COUNTY OF A

CERTIFICATE OF THE COUNTY; AND AUTHORIZING THE EXECUTION AND DELIVERY OF AND APPROVING OTHER RELATED DOCUMENTS AND ACTIONS IN CONNECTION THEREWITH

The following Resolution was duly passed by the Board of Supervisors of the County of Placer at a regular meeting held______, by the following vote on roll call:

Ayes:

Noes:

Absent:

Signed and approved by me after its passage. ______Chair, Board of Supervisors

Attest:

______Clerk of said Board

WHEREAS, the County of Placer (the “County”) is a political subdivision duly organized and existing under the Constitution and laws of the State of California; and

WHEREAS, the County previously entered into an Amended and Restated Sale Agreement, as of June 1, 2002, and amended and restated as of June 1, 2006 (the “Sale Agreement”), with the Gold Country Settlement Funding Corporation (the “Corporation”), Page 1 of 4 157 pursuant to which the County sold certain tobacco assets (the “County Tobacco Assets”) to the Corporation; and

WHEREAS, the Corporation previously entered into an Amended and Restated Secured Loan Agreement, as of June 1, 2002, as amended and restated as of June 1, 2006 (the “Prior Loan Agreement”), with The California County Tobacco Securitization Agency (the “Agency”), pursuant to which the Agency loaned the proceeds of its Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation), Series 2006 (the “Prior Bonds”), issued pursuant to an Amended and Restated Indenture, as of June 1, 2002, and amended and restated as of June 1, 2006 (the “Prior Indenture”), by and between the Agency and The Bank of New York Trust Company, N.A., as prior trustee, to the Corporation (the “Prior Loan”) to refinance the Corporation’s obligation to make loan payments to the Agency; and

WHEREAS, the Corporation now desires to prepay the Prior Loan with proceeds derived from a new loan from the Agency (the “2020 Loan”) pursuant to a further amendment and restatement of the Prior Loan Agreement (the “Loan Agreement”) by and between the Corporation and the Agency; and

WHEREAS, the Agency now proposes to issue its Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020 (the “Series 2020 Bonds”) pursuant to a further amendment and restatement of the Prior Indenture, as supplemented by the Series 2020 Supplement (collectively, the “Indenture”), both to be entered into by and between the Agency and The Bank of New York Mellon Trust Company, N.A., as indenture trustee, the proceeds of which will be loaned to the Corporation pursuant to the Loan Agreement for application to the prepayment of the Prior Loan and the refunding in full of the Prior Bonds and for the other authorized purposes including making a payment to the registered owner of the Residual Certificate held in accordance with the Trust Agreement (defined below) for certain capital improvements of the County; and

WHEREAS, the Series 2020 Bonds will be limited obligations of the Agency secured solely by the collateral pledged under the Indenture, which collateral consists of loan payments made by the Corporation under the Loan Agreement together with certain other funds, assets and proceeds described therein; and

WHEREAS, the County now desires to consent to the issuance of the Series 2020 Bonds; and

WHEREAS, in the event that the prepayment in full of the Prior Loan and related refunding of all of the Prior Bonds is not practicable, the County desires to consent the prepayment of a portion of the Prior Loan and the refunding of a corresponding portion of the Prior Bonds and authorize all necessary changes and actions to effect such partial prepayment and refunding; and

WHEREAS, the County desires to execute and deliver a Certificate of the County (the “Certificate of the County”) attached to the bond purchase agreement, dated the date of sale of the Series 2020 Bonds (the “Bond Purchase Agreement”), by and between the Agency and the underwriter named therein; and

WHEREAS, all acts, conditions and things required by the Constitution and laws of the State of California to exist, have happened and have been performed precedent to and in connection with the consummation of the actions authorized hereby exist, have happened and have been performed in regular and due time, form and manner as required by law, and the Page 2 of 4 158 County is now duly authorized and empowered, pursuant to each and every requirement of law, to consummate such actions for the purpose, in the manner and upon the terms herein provided;

NOW, THEREFORE, THE BOARD OF SUPERVISORS OF THE COUNTY OF PLACER, DOES HEREBY RESOLVE, DETERMINE AND ORDER AS FOLLOWS:

Section 1. Recitals. The Board of Supervisors finds each of the foregoing recitals is true and correct.

Section 2. Consent to Series 2020 Bonds; Approval of Preliminary Offering Circular. The County consents to the issuance and sale of the Series 2020 Bonds by the Agency in one or more series of current interest bonds and/or capital appreciation bonds and/or convertible capital appreciation bonds that may be issued and secured as senior bonds or subordinate bonds; provided, however, that the aggregate initial principal amount of the Series 2020 Bonds shall not exceed $67,000,000, the true interest cost of the Series 2020 Bonds shall not exceed 5.00%, and the final maturity of the Series 2020 Bonds shall not be later than June 1, 2060. The County approves the draft Preliminary Offering Circular related to the Series 2020 Bonds in substantially the final form attached to the County staff report submitted with this resolution with such additions thereto and changes therein as are recommended or approved by counsel to the County and approved by the Authorized Officer (hereinafter mentioned) executing the same, such approval to be conclusively evidenced by the execution and delivery of the Certificate of the County referred to in Section 3 of this resolution.

Section 3. Certificate of the County. The form of the Certificate of the County, in substantially the final form attached to the County staff report submitted with this resolution, is hereby approved, and the Chair of the Board of Supervisors, and such other member of the Board of Supervisors as the Chair may designate, the Treasurer - Tax Collector of the County, the County Executive Officer or any other person or persons designated by the Treasurer - Tax Collector of the County or the County Executive Officer (collectively, the “Authorized Officers”) are each hereby authorized and directed, for and in the name and on behalf of the County, to execute and deliver the Certificate of the County in substantially said form, with such additions thereto and changes therein as are recommended or approved by counsel to the County and approved by the Authorized Officer executing the same, such approval to be conclusively evidenced by the execution and delivery thereof.

Section 4. Authorization of Actions Necessary for Partial Refunding of Prior Bonds. If a full refunding of the Prior Bonds (and a prepayment in full of the Prior Loan) is not practicable, the County hereby authorizes all necessary actions to be taken to prepay a portion of the Prior Loan and effect a partial refunding of the Prior Bonds. The County authorizes such amendments to the Prior Loan Agreement, the Prior Indenture, the Declaration and Agreement of Trust, dated as of June 1, 2002 (the “Trust Agreement”), by and between the Corporation and the trustee named therein and any other documents, as with the advice of counsel to the County, may be necessary to effectuate a partial prepayment of the Prior Loan and a partial refunding of the Prior Bonds. Any Authorized Officer is authorized and directed to execute or consent to, for and on behalf of the County, any such amendments to the Prior Loan Agreement, the Prior Indenture, the Trust Agreement and any other documents to effectuate such partial prepayment of the Prior Loan and partial refunding of the Prior Bonds.

Section 5. Other Actions. The Authorized Officers are hereby authorized and directed, jointly and severally, to take all actions and execute any and all documents they may deem necessary or advisable in order to consummate the transactions herein authorized and otherwise to carry out, give effect to and comply with the terms and intent of this Resolution, including, but Page 3 of 4 159 not limited to, the execution and delivery of a tax certificate relating to the Series 2020 Bonds, and any certifications and other documents that are delivered in compliance or consistent with the requirements of the Sale Agreement, the Loan Agreement, the Indenture and the Bond Purchase Agreement and any and all changes to the documents necessary to effect a partial refunding of the Prior Bonds (and corresponding partial prepayment of the Prior Loan). All actions heretofore taken by the officers, employees and agents of the County (or their designees) with respect to the transactions set forth above are hereby ratified, confirmed and approved.

Section 6. Effective Date. This resolution shall take effect immediately upon its passage.

The foregoing Resolution was on the ____ day of October, 2020, adopted by the Board of Supervisors of the County of Placer and ex officio the governing body of all other special assessment and taxing districts, agencies and authorities for which the Board so acts.

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ATTACHMENT C

FORM OF CERTIFICATE OF THE COUNTY OF PLACER

The California County Tobacco Securitization Agency (the “Issuer”) proposes to cause the issuance and delivery of $[Aggregate Par] aggregate initial principal amount of the Issuer’s Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation) Series 2020, consisting of $[Senior Par] Series 2020A (Senior) and $[Subordinate Par] Series 2020B (Subordinate) (collectively, the “Series 2020 Bonds”). The Series 2020 Bonds are dated, mature, bear or accrete interest and shall have such other terms as are set forth in the Indenture, hereinafter referenced. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Indenture or the Contract of Purchase, as the case may be, each hereinafter referenced.

The Series 2020 Bonds will be issued and secured under and pursuant to an Amended and Restated Indenture, dated as of June 1, 2002, as amended and restated as of June 1, 2006 and as amended and restated as of [As of Date], as supplemented by a Series 2020 Supplement, dated as of [As of Date] (collectively, the “Indenture”), each by and between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture Trustee”). Proceeds of the Series 2020 Bonds will be used to (i) refund and defease all of the Issuer’s outstanding Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2006 (the “Refunded Bonds”), (ii) fund deposits to the Liquidity Reserve Accounts and Debt Service Accounts held under the Indenture, (iii) fund a payment to the registered owner of the Residual Certificate for certain capital improvements of the County of Placer (the “County”) and (iv) pay costs of issuance in connection with the issuance of the Series 2020 Bonds. To facilitate the refunding and defeasance of the Refunded Bonds, the Issuer will deposit a portion of the net proceeds of the Series 2020 Bonds, along with other available funds under the Indenture, with The Bank of New York Mellon Trust Company, N.A., in its capacity as escrow agent (the “Escrow Agent”) under an escrow agreement, dated as of [As of Date] (the “Escrow Agreement”), by and between the Issuer and the Escrow Agent.

In connection with the issuance of the Issuer’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation), Series 2002 (the “Series 2002 Bonds”), which were refunded by the Refunded Bonds, the Issuer and the Gold Country Settlement Funding Corporation (the “Corporation”) executed a Secured Loan Agreement, dated as of June 1, 2002 (the “2002 Loan Agreement”), as amended and restated as of June 1, 2006 (as so amended and restated, the “2006 Loan Agreement”). Under the 2002 Loan Agreement, the Issuer financed the purchase by the Corporation from the County of all of the right, title and interest of the County in and to the payments to be received from and after May 1, 2003 by the County from the State under the MSA (the “County Tobacco Assets”) by loaning the proceeds of the Series 2002 Bonds to the Corporation. The proceeds of the sale of the County Tobacco Assets were used for the benefit of the County and its residents in connection with one or more specific capital projects. The 2006 Loan Agreement will be amended and restated upon the issuance of the Series 2020 Bonds and the concurrent defeasance of the Refunded Bonds (the 2006 Loan Agreement, as so amended and restated, the “Loan Agreement”). The Series 2020 Bonds are secured by the Collateral.

The Series 2020 Bonds are to be sold by the Issuer pursuant to the Contract of Purchase between the Issuer and Stifel Nicolaus & Company, Incorporated (the “Underwriter”), dated [Pricing Date] (the “Contract of Purchase”).

This Certificate may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Delivery of an executed signature page of this Certificate by facsimile or email transmission shall be effective as delivery of a manually signed counterpart hereof.

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In connection with the Contract of Purchase and the Series 2020 Bonds, the County hereby certifies as follows:

(a) Due Organization and Authority; Legal, Valid and Binding Obligations. The County is a political subdivision of the State duly organized and operating pursuant to the Constitution and laws of the State and has all necessary power and authority to adopt the resolution of the County, dated [County Resolution Date], authorizing the County transactions described herein (the “County Resolution”) and enter into and perform its duties under the Sale Agreement, the MOU, the ARIMOU and the Consent Decree. The County Resolution has been duly adopted and has not been rescinded, and the Sale Agreement, the MOU and the ARIMOU constitute legal, valid and binding obligations of the County in accordance with their respective terms, subject to the effect of bankruptcy, reorganization, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally or the application of equitable principles in any proceeding, whether at law or in equity and by the limitations on legal remedies imposed on actions against public agencies in the State, and none of the Sale Agreement, the MOU, the ARIMOU and the Consent Decree has been amended, supplemented or modified, and, each remains in full force and effect as of the date hereof and will so remain on the date of the Closing.

(b) No Conflict. The adoption of the County Resolution does not and will not conflict with or constitute a breach of or default under any material agreement or other instrument (including the MOU and the ARIMOU) to which the County is a party, or any court order, consent decree (including the Consent Decree), statute, rule, regulation or any other law to which the County presently is subject.

(c) No Consents Required. After due inquiry, except as may be required under blue sky or other securities laws of any state, or with respect to any permits or approval heretofore received which are in full force and effect or the requirement for which is otherwise disclosed in the Offering Circular, there is no consent, approval, authorization or other order of, or filing with, or certification by, any Governmental Authority having jurisdiction over the County, required for the valid execution, delivery or performance by the County of the Sale Agreement, the MOU, the ARIMOU or the Consent Decree or the continued performance by the County of its obligations thereunder.

(d) No Litigation. Except as disclosed in the Offering Circular, there is no action, suit, proceeding or investigation at law or in equity before or by any court or Governmental Authority pending against the County in which service of process has been completed against the County, or to the knowledge of the County threatened against the County, which would have a material adverse effect on the enforceability of the MSA or the payment of County Tobacco Assets thereunder, or in any way contesting or affecting the validity of the Sale Agreement, the County Resolution, the MOU, the ARIMOU, the Consent Decree or the transactions authorized thereby or by the Contract of Purchase or the legal existence of the County or the title of its officers to their respective offices, or in any way contesting or otherwise affecting the validity of the Sale Agreement, the MOU, the ARIMOU, the Consent Decree or in which a final adverse decision would declare any provision of the Sale Agreement, the MOU, the ARIMOU, the Consent Decree to be invalid or unenforceable in whole or in material part.

(e) No Breach or Default. The County is not in breach of or in default under any applicable law or administrative regulation of the State or the United States or any applicable judgment or decree or any loan agreement, indenture, bond, note, resolution, agreement

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or other instrument to which the County is a party or is otherwise subject, which breach or default would have a material and adverse impact on the County’s ability to perform its obligations under the Sale Agreement, the MOU, the ARIMOU or the Consent Decree, and no event has occurred and is continuing which, with the passage of time or the giving of notice, or both, would constitute such a default or event of default under any such instrument.

(f) Certain Representations by the County. The County hereby represents and warrants on the date hereof and on and as of the Closing that, except as described in the Preliminary Offering Circular and in the Offering Circular: (1) to the knowledge of the County, after reasonable investigation, the representations and warranties of the County set forth in the Sale Agreement, MOU, ARIMOU and Consent Decree are true and correct in all material respects; (2) to the knowledge of the County, after reasonable investigation, no default or event of default has occurred and is continuing under the Sale Agreement, MOU, ARIMOU and Consent Decree or will occur upon the issuance of the Series 2020 Bonds; and (3) to the knowledge of the County, after reasonable investigation, the County is in compliance with the terms and conditions of each of the Sale Agreement, MOU, ARIMOU and Consent Decree and has performed or complied with all of its obligations, agreements and covenants to be performed or complied with thereunder.

(g) Agreement to Preserve Tax Exemption. The County covenants that it will not take any action which would cause interest on the Series 2020 Bonds to be subject to federal income taxation or California personal income taxes (other than to the extent the Series 2020 Bonds will be subject to federal income taxation as described under the caption “TAX MATTERS” in the Offering Circular), and that it will take such action as may be necessary to preserve the tax-exempt status of the Series 2020 Bonds.

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Dated: ______, 2020

COUNTY OF PLACER

By: ______Authorized Officer

Accepted and confirmed as of the date above written

STIFEL NICOLAUS & COMPANY, INCORPORATED

By: ______Authorized Representative

164 PRELIMINARY OFFERING CIRCULAR DATED ______, 2020 New Issue – Book-Entry Only Ratings: See “RATINGS” herein. In the opinion of Norton Rose Fulbright US LLP, San Francisco, California, Bond Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming compliance with certain covenants in the documents pertaining to the Series 2020 Bonds and requirements of the Internal Revenue Code of 1986, as amended, as described herein, interest on the Series 2020 Bonds is not included in the gross income of the owners thereof for federal income tax purposes. In the further opinion of Bond Counsel, interest on the Series 2020 Bonds is not treated as an item of tax preference for purposes of the federal alternative minimum tax. Bond Counsel is also of the opinion that, under existing law, interest on the Series 2020 Bonds is exempt from personal income taxes of the State of California. See “TAX MATTERS” herein. $______* THE CALIFORNIA COUNTY TOBACCO SECURITIZATION AGENCY Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation) $______* Series 2020A (Senior) $______* Series 2020B-1 (Subordinate) $______* Series 2020B-2 (Subordinate)

Dated: Date of Delivery Due: June 1, as set forth on inside cover page The California County Tobacco Securitization Agency (the “Agency”) is a public entity created pursuant to a Joint Exercise of Powers Agreement, dated as of November 15, 2000, as amended, by and among the County of Placer, California (the “County”) and eight other counties in the State of California (each, a “Member”). The Agency is a separate entity from the County, and its debts, liabilities and obligations do not constitute debts, liabilities or obligations of the County or its other Members. See “THE AGENCY” herein. The Agency is issuing its $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020A (Senior) (the “Series 2020A Senior Bonds”), $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-1 (Subordinate) (the “Series 2020B-1 Subordinate Bonds”) and $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-2 (Subordinate) (the “Series 2020B-2 Subordinate Bonds” and, together with the Series 2020B-1 Subordinate Bonds, the “Series 2020B Subordinate Bonds” and the Series 2020B Subordinate Bonds together with the Series 2020A Senior Bonds, the “Series 2020 Bonds”), pursuant to an Amended and Restated Indenture and a Series 2020 Supplement (collectively, the “Indenture”), each dated as of _____ 1, 2020, by and between the Agency and The Bank of New York Mellon Trust Company, N.A., a national banking association, as indenture trustee (the “Indenture Trustee”). The Agency will use the proceeds from the issuance of the Series 2020 Bonds, together with other available funds, to (i) refund on a current basis all of the Agency’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2006 (the “Series 2006 Bonds”) through defeasance and redemption, (ii) fund deposits to the Liquidity Reserve Accounts and Debt Service Accounts held under the Indenture, (iii) fund a payment to the registered owner of the Residual Certificate (as defined herein) for certain capital improvements of the County and (iv) pay costs of issuance in connection with the issuance of the Series 2020 Bonds. The Series 2020A Senior Bonds will be senior to the Series 2020B Subordinate Bonds in payment priority under the Indenture, as described herein. The Series 2020 Bonds, together with any Additional Bonds and Junior Bonds (each as defined herein) issued under the Indenture, are referred to herein as the “Bonds”. Gold Country Settlement Funding Corporation, a California nonprofit, public benefit corporation (the “Corporation”), previously purchased all of the “County Tobacco Assets,” which consist of all of the County’s right, title and interest in and to the payments from and after May 1, 2003 required to be made to the State of California (the “State”) under the Master Settlement Agreement entered into on November 23, 1998 (the “MSA”) by participating cigarette manufacturers (the “PMs”), 46 states (including the State) and six other U.S. jurisdictions in settlement of certain cigarette - related litigation, and made payable to the County pursuant to a Memorandum of Understanding (the “MOU”) and the Agreement Regarding Interpretation of Memorandum of Understanding (the “ARIMOU”), each among the State, various California cities and counties and certain other parties. The Corporation purchased the County Tobacco Assets from the County pursuant to a Sale Agreement, entered into as of June 1, 2002, as amended and restated as of June 1, 2006 (the “Sale Agreement”), by and between the County and the Corporation, with funds derived from a loan of the proceeds of the Agency’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2002 (which were refunded by the Series 2006 Bonds) made by the Agency to the Corporation pursuant to a Secured Loan Agreement, entered into as of June 1, 2002 (the “Prior Loan Agreement”), as amended and restated as of June 1, 2006, and as further amended and restated as of ______1, 2020 (as so amended and restated, the “Loan Agreement”), by and between the Agency, as lender, and the Corporation, as borrower. The Bonds are payable solely from the Loan Payments, as defined in and paid under the Loan Agreement, the Corporation Tobacco Assets (as defined herein), which include the County Tobacco Assets purchased from the County under the Sale Agreement, and the other Collateral (as defined herein) pledged under the Indenture. See “SECURITY FOR THE BONDS” herein. The amount of the payments made on the County Tobacco Assets received pursuant to the MSA, the MOU, the ARIMOU and the Consent Decree (the “Tobacco Settlement Revenues”) depends on many factors, including future domestic cigarette consumption, the financial capability of the PMs and the domestic , litigation generally, including litigation challenging the MSA and related state statutes, and federal, state and local regulations affecting the domestic tobacco industry. Payments by the PMs under the MSA are subject to certain adjustments, including the NPM Adjustment (as defined herein), which may be material. As discussed further herein, the State was one of several jurisdictions to enter into settlements with the OPMs and certain SPMs (each as defined herein) regarding claims related to the 2003 through 2022 NPM Adjustments and the determination of subsequent NPM Adjustments. See “RISK FACTORS” and “LEGAL CONSIDERATIONS” herein. Prospective investors should carefully consider the discussion of certain risks and other considerations contained in “RISK FACTORS” and “LEGAL CONSIDERATIONS,” as well as the other information contained in this Offering Circular, regarding an investment in the Series 2020 Bonds. The Series 2020B-2 Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors. See “RISK FACTORS—Market for Series 2020B-2 Subordinate Bonds; No Credit Rating on Series 2020B-2 Subordinate Bonds.” One or a combination of the risk factors discussed herein, and other risks, may materially adversely affect the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full, and could have a material adverse effect on the liquidity and/or market value of the Series 2020 Bonds.

165 The Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds will be sold in denominations of $5,000 or any integral multiple thereof, and the Series 2020B Subordinate Bonds will be sold such that the Accreted Value thereof at the Maturity Date is in the denomination of $250,000 or any integral multiple of $5,000 in excess thereof. Interest on the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds will be payable semi-annually on June 1 and December 1 of each year (each, a “Distribution Date”), commencing [*June 1, 2021*]. Interest on the Series 2020B Subordinate Bonds will not be paid currently but will accrete in value, compounded semiannually on each Distribution Date, commencing [*June 1, 2021*] (to become part of Accreted Value as more fully described herein), from the initial principal amount on the date of delivery thereof to maturity or earlier redemption, at the Accretion Rate (as defined herein) thereof. The Series 2020A Senior Bonds are subject to optional redemption and optional clean-up call, and the Series 2020B Subordinate Bonds are subject to optional redemption and mandatory clean-up call, each as described herein. The Series 2020A Senior Bonds that are Term Bonds are subject to mandatory redemption in satisfaction of Sinking Fund Installments (as defined herein). The Series 2020B Subordinate Bonds are subject to extraordinary payment following a Subordinate Payment Default, as described herein. The Series 2020B Subordinate Bonds are Turbo Term Bonds subject to Turbo Redemption, to the extent of Turbo Available Collections, as described herein. Turbo Redemptions, if any, of the Series 2020B Subordinate Bonds will be credited against the Series 2020B Subordinate Bonds in chronological order of scheduled maturity. It is expected that payment of principal or Accreted Value of the Series 2020B Subordinate Bonds will be substantially earlier than the Turbo Term Bond Maturities therefor. Failure to pay Turbo Redemptions on the Series 2020B Subordinate Bonds will not constitute a Subordinate Payment Default or any other Event of Default under the Indenture to the extent that such failure results from the insufficiency of Turbo Available Collections. The ratings for the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds address only (i) the payment of interest on such Bonds, when due, and (ii) the payment of principal of such Bonds by their Maturity Dates (and, with respect to the Series 2020A Senior Bonds that are Term Bonds, Sinking Fund Installment dates). The ratings do not address the payment of the Turbo Redemptions on the Series 2020 B-1 Subordinate Bonds. The Series 2020B-2 Subordinate Bonds are not rated. See “THE SERIES 2020 BONDS” and “RATINGS” herein. ______See Inside Front Cover Page for Maturity Schedule, Principal Amounts or Accreted Values at Maturity, Interest or Accretion Rates, Prices or Yields and Expected Average Lives ______The Series 2020 Bonds are limited obligations of the Agency, payable from and secured solely by the Collateral pledged under the Indenture. The Owners have no recourse to other assets of the Agency, including, but not limited to, any assets pledged to secure payment of any other debt obligation of the Agency. If, notwithstanding the limitation on recourse described in the preceding sentence, any Owners are deemed to have an interest in any asset of the Agency pledged to the payment of other debt obligations of the Agency, the Owners’ interest in such asset shall be subordinate to the claims and rights of the holders of such other debt obligations, and the Indenture will constitute a subordination agreement for purposes of Section 510(a) of the U.S. Bankruptcy Code. The Series 2020 Bonds are not secured by the proceeds thereof, with the exception of the proceeds deposited in the Senior Liquidity Reserve Account (as defined herein) or the Subordinate Liquidity Reserve Account (as defined herein), as applicable. The Series 2020 Bonds do not constitute a charge against the general credit of the Agency or any of its Members, including the County, and under no circumstances shall the Agency or any Member, including the County, be obligated to pay the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds, except from the Collateral pledged therefor under the Indenture. The Agency has no taxing power. Neither the credit of the State, nor of any public agency of the State (other than the Agency), nor of any Member of the Agency, including the County, is pledged to the payment of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds. The Series 2020 Bonds do not constitute a debt, liability or obligation of the State or any public agency of the State (other than the Agency) or any Member of the Agency, including the County. The County is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof. The Series 2020 Bonds do not constitute a debt, liability or obligation of the Corporation, and the Corporation is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof. The cover page contains information for quick reference only. It is not a summary of this issue. Investors must read the entire Offering Circular to obtain information essential to making an informed investment decision. Stifel

The Series 2020 Bonds are offered when, as and if issued and accepted by the Underwriter, subject to the approval of validity by Norton Rose Fulbright US LLP, as Bond Counsel to the Agency. Certain legal matters with respect to the Agency, the Corporation and the County will be passed upon by County Counsel. Certain legal matters will be passed upon for the Agency by Norton Rose Fulbright US LLP, as Disclosure Counsel to the Agency, and for the Underwriter by its counsel, Hawkins Delafield & Wood LLP. It is expected that the Series 2020 Bonds will be available for delivery in book-entry form only through DTC in New York, New York on or about ______, 2020. Date: ______, 2020

* Preliminary, subject to change.

166 MATURITY SCHEDULE*

$______THE CALIFORNIA COUNTY TOBACCO SECURITIZATION AGENCY Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation)

$______Series 2020A (Senior) Series 2020A Serial Bonds

Maturity CUSIP† No. Maturity CUSIP† No. Date Principal Interest Price or (Base CUSIP Date Principal Interest Price or (Base CUSIP (June 1) Amount Rate Yield ______) (June 1) Amount Rate Yield ______) $ % % $ % %

$______% Series 2020A Term Bonds due June 1, 20__, Price/Yield ___%, CUSIP† No. ______

$______Series 2020B-1 (Subordinate) $______% Series 2020B-1 Turbo Term Bonds due ______(Expected Average Life(1): _____ years) Price/Yield ___%, CUSIP† No. ______

$______Series 2020B-2 (Subordinate)(2) $______Series 2020B Capital Appreciation Turbo Term Bonds Initial Principal Amount per $5,000 Expected CUSIP† No. Maturity Date Initial Principal Accreted Value Accreted Value at Average (Base CUSIP (June 1) Amount Accretion Rate at Maturity(3) Maturity Life(1) ______) $ % $ $ years

______* Preliminary, subject to change. (1) Assumes Turbo Redemption payments are made in accordance with the Tobacco Settlement Revenues Projection Methodology and Assumptions described herein under “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.” See the table entitled “Projected Series 2020 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds” in “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” herein. No assurance can be given that these structuring assumptions will be realized. (2) The Series 2020B-2 Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors. See “RISK FACTORS—Market for Series 2020B Subordinate Bonds; No Credit Rating on Series 2020B-2 Subordinate Bonds.” (3) Represents Accreted Value at the Maturity Date. However, Turbo Redemptions will be made to the extent of Turbo Available Collections at the Accreted Value calculated as of the redemption date. † Copyright American Bankers Association. CUSIP data herein are provided by CUSIP Global Services, which is managed on behalf of the American Bankers Association by S&P Global Market Intelligence, a division of S&P Global Inc. The CUSIP numbers listed above are being provided solely for the convenience of Owners only at the time of issuance of the Series 2020 Bonds and the Agency, the Corporation, the County, the Indenture Trustee and the Underwriter do not make any representation with respect to such numbers or undertake any responsibility for their accuracy now or at any time in the future. A CUSIP number is subject to being changed after the issuance of the Series 2020 Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement that is applicable to all or a portion of the Series 2020 Bonds.

167 Certain persons participating in this offering may engage in transactions that stabilize or maintain the prices of the securities at levels above those which might otherwise prevail in the open market, or otherwise affect the prices of the securities offered hereby, including over-allotment and stabilizing transactions. Such stabilizing, if commenced, may be discontinued at any time.

No dealer, broker, salesperson or other person is authorized in connection with any offering made hereby to give any information or make any representation other than as contained herein, and, if given or made, such information or representation must not be relied upon as having been authorized by the Agency, the Corporation, the County, or the Underwriter. This Offering Circular does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation.

There is currently a limited secondary market for securities such as the Series 2020 Bonds. There can be no assurance that a secondary market for the Series 2020 Bonds will develop, or if one develops, that it will provide bondholders with liquidity or that it will continue for the life of the Series 2020 Bonds.

This Offering Circular contains information furnished by the Agency, the Corporation, IHS Global Inc. (“IHS Global”), the Department of Finance of the State of California (the “Department of Finance”) and other sources, all of which are believed to be reliable. Information concerning the domestic tobacco industry and participants therein has been obtained from certain publicly available information provided by certain participants and certain other sources (see “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY”). The participants in such industry have not provided any information to the Agency, the Corporation or the County for use in connection with this offering. In certain cases, domestic tobacco industry information provided herein (such as market share data) may be derived from sources which are inconsistent or in conflict with each other. The Agency, the Corporation and the County have no knowledge of any facts indicating that the information under the caption “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY” herein is inaccurate in any material respect, but the Agency, the Corporation and the County have not verified this information and cannot and do not warrant the accuracy or completeness of this information. The information contained under the caption “SUMMARY OF THE TOBACCO CONSUMPTION REPORT” and in the Tobacco Consumption Report attached as APPENDIX A hereto has been included in reliance upon IHS Global as an expert in econometric forecasting and has not been verified for accuracy or appropriateness of assumptions, although the Agency, the Corporation and the County have no knowledge that the information is not materially accurate and complete. The information contained under the caption “DEPARTMENT OF FINANCE POPULATION FORECAST” has been included in reliance upon the Department of Finance and has not been verified for accuracy or appropriateness of assumptions, although the Agency, the Corporation and the County have no knowledge that the information is not materially accurate and complete.

The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Offering Circular nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Agency, the Corporation or the County or the matters covered by the report of IHS Global included as APPENDIX A hereto, or under the captions “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY” and “DEPARTMENT OF FINANCE POPULATION FORECAST” herein, since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. Such information and expressions of opinion are made for the purpose of providing information to prospective investors and are not to be used for any other purpose or relied on by any other party. With respect to certain matters relating to the Series 2020 Bonds, the Agency has undertaken to provide updates to investors through a national information repository. See “CONTINUING DISCLOSURE UNDERTAKING” and APPENDIX H – “FORM OF CONTINUING DISCLOSURE UNDERTAKING” herein.

This Offering Circular contains forecasts, projections and estimates that are based on current expectations or assumptions. In light of the important factors that may materially affect the amount of Tobacco Settlement Revenues (see “RISK FACTORS,” “LEGAL CONSIDERATIONS,” “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT,” “THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT,” “SUMMARY OF THE TOBACCO CONSUMPTION REPORT” and “DEPARTMENT OF FINANCE POPULATION FORECAST” herein), the inclusion in this Offering Circular of such forecasts, projections and estimates should not be regarded as a representation by the Agency, the Corporation, the

168 County, IHS Global, the Department of Finance or the Underwriter that the results of such forecasts, projections and estimates will occur. Such forecasts, projections and estimates are not intended as representations of fact or guarantees of results.

If and when included in this Offering Circular, the words “expects,” “forecasts,” “projects,” “intends,” “anticipates,” “estimates,” “assumes” and analogous expressions are intended to identify forward-looking statements and any such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those that have been projected. Such risks and uncertainties include, among others, general economic and business conditions, changes in political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, litigation and various other events, conditions and circumstances, many of which are beyond the control of the Agency. These forward-looking statements speak only as of the date of this Offering Circular. The Agency disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any changes in the Agency’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

References in this Offering Circular to the Act, the Indenture, the Loan Agreement, the Sale Agreement and the Continuing Disclosure Undertaking do not purport to be complete. Refer to the Act, the Indenture, the Loan Agreement, the Sale Agreement and the Continuing Disclosure Undertaking for full and complete details of their provisions. Copies of the Act, the Indenture, the Loan Agreement, the Sale Agreement and the Continuing Disclosure Undertaking are on file with the Agency and the Indenture Trustee.

The order and placement of material in this Offering Circular, including its appendices, are not to be deemed a determination of relevance, materiality or importance, and all materials in this Offering Circular, including its appendices, must be considered in their entirety.

The Underwriter has provided the following sentence for inclusion in this Offering Circular: The Underwriter has reviewed the information in this Offering Circular in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

169 TABLE OF CONTENTS

SUMMARY STATEMENT ...... S-1 Regulation Which Could Adversely Affect the Volume of INTRODUCTORY STATEMENT ...... 1 Sold in the U.S. and Thus Payments Under the SECURITY FOR THE BONDS ...... 3 MSA ...... 42 Sale Agreement ...... 3 The Volume of Cigarettes Sold by PMs in the U.S. Cigarette Loan Agreement ...... 4 Market is Expected to Continue to Decline as a Result of Collateral under the Indenture ...... 4 Increases in Cigarette Excise Taxes ...... 43 Liquidity Reserve Accounts ...... 4 The Volume of Cigarettes Sold by PMs in the U.S. Cigarette Defeasance ...... 5 Market is Expected to Continue to Decline Because of Limited Obligations ...... 6 Legislation Raising the Minimum Age for Purchase and Flow of Funds ...... 6 Possession of Cigarettes ...... 43 Events of Default; Remedies ...... 10 Increased Restrictions on Smoking in Public Places Could Additional Bonds ...... 12 Adversely Affect U.S. Tobacco Consumption and Therefore Junior Bonds ...... 12 Amounts to be Paid Under the MSA ...... 44 Non-Impairment Covenants ...... 12 Several of the PMs and Their Competitors Have Developed THE SERIES 2020 BONDS ...... 13 Alternative Tobacco and Cigarette Products, Including General ...... 13 Electronic Cigarettes and Vaporizers, Sales of Which Do Not Payments on the Series 2020 Bonds ...... 14 Currently Result in Payments Under the MSA, and Have Mandatory Redemption of Series 2020A Senior Term Bonds by Announced Long-Term Goals of Ending the Sale of Sinking Fund Installments ...... 15 Traditional Cigarettes in Favor of Such Alternative Products ...... 44 Turbo Redemption of Series 2020B Subordinate Bonds...... 15 U.S. Tobacco Companies are Subject to Significant Limitations Optional Redemption ...... 15 on Advertising and Marketing Cigarettes That Could Application of Funds Following a Senior Payment Default ...... 16 Negatively Affect Sales Volume ...... 46 Extraordinary Payment of Series 2020B Subordinate Bonds Federal, State and Local Anti-Smoking Campaigns Could Following a Subordinate Payment Default ...... 16 Negatively Affect Cigarette Sales Volume ...... 46 Mandatory Redemption from Lump Sum Payments and Total The Distribution Chain for Cigarettes May Continue to be Lump Sum Payments ...... 16 Curtailed, Which Could Negatively Affect Sales Volume ...... 46 Clean-Up Call Redemption ...... 16 Products May Reduce Cigarette Sales Notice of Redemption ...... 17 Volumes and Adversely Affect Payments Under the MSA ...... 47 Selection of Series 2020 Bonds for Redemption ...... 17 The U.S. Cigarette Industry is Subject to Significant Legal, Effect of Redemptions on Sinking Fund Installments and Turbo Regulatory, and Other Requirements That Could Adversely Term Bond Maturities ...... 18 Affect the Businesses, Results of Operations or Financial Limitation on Open Market Purchases ...... 18 Condition of Tobacco Product Manufacturers ...... 47 THE AGENCY ...... 18 The Availability of Counterfeit Cigarettes Could Adversely Commission ...... 18 Affect Payments by the PMs Under the MSA ...... 47 Officers ...... 19 General Economic and Other Conditions, including the COVID- THE CORPORATION ...... 19 19 Pandemic, May Adversely Affect Consumption of PLAN OF FINANCE ...... 19 Cigarettes and the Ability of the PMs to Continue to Operate, ESTIMATED SOURCES AND USES OF FUNDS ...... 20 Reducing Their Sales of Cigarettes and Payments Under the TABLES OF PROJECTED BOND DEBT SERVICE AND MSA ...... 48 COVERAGE...... 20 If Litigation Challenging the MSA, the Qualifying Statutes and Series 2020A Senior Bonds Debt Service and Projected Debt Related Legislation Were Successful, Payments Under the Service Coverage ...... 21 MSA Might be Suspended or Terminated ...... 49 Projected Series 2020 Bonds Debt Service Schedule Litigation Seeking Monetary and Other Relief from Tobacco Incorporating Turbo Redemptions of the Series 2020B Industry Participants May Adversely Affect the Ability of the Subordinate Bonds ...... 22 PMs to Continue to Make Payments Under the MSA ...... 50 SERIES 2020B SUBORDINATE BONDS PROJECTED TURBO The PMs Have Substantial Payment Obligations Under Litigation REDEMPTION UNDER VARIOUS CONSUMPTION Settlement Agreements Which, Together With Their Other DECLINE SCENARIOS...... 23 Litigation Liabilities, May Adversely Affect the Ability of the Series 2020B Subordinate Bonds Projected Final Turbo PMs to Continue Operations in the Future ...... 52 Redemption Payment Dates Under Various Consumption Risks Relating to the Tobacco Consumption Report ...... 52 Decline Scenarios...... 23 Other Risks Relating to the MSA and Related Statutes ...... 52 BREAKEVEN CONSUMPTION AND REVENUE DECLINE Bankruptcy of a PM May Delay, Reduce or Eliminate Payments RATES BY MATURITY...... 25 Under the MSA ...... 53 Series 2020 Bonds Consumption Decline Rates By Maturity ...... 26 Failures by PMs to Make Payments Under the MSA Could be Projected Series 2020 Bonds Debt Service Under a [–____%] Coupled with an Inability on the Part of the Settling States to Constant Annual Cigarette Shipment Decline ...... 27 Enforce and Collect Defaulted Payments ...... 54 TOBACCO SETTLEMENT REVENUES PROJECTION Potential Payment Adjustments for Population Changes Under the METHODOLOGY AND BOND STRUCTURING MOU and the ARIMOU ...... 54 ASSUMPTIONS ...... 28 Series 2020 Bonds Secured Solely by the Collateral ...... 55 Introduction...... 28 Uncertainty as to Timing of Turbo Redemptions of the Series Tobacco Settlement Revenues Projection Methodology and 2020B Subordinate Bonds ...... 55 Assumptions ...... 28 Limited Remedies ...... 55 Projection of Tobacco Settlement Revenues to be Received by the Limited Liquidity of the Series 2020 Bonds; Price Volatility ...... 56 Indenture Trustee ...... 31 Limited Nature of Ratings; Reduction, Suspension or Withdrawal Bond Structuring Methodology and Assumptions ...... 33 of a Rating ...... 56 RISK FACTORS ...... 34 Market for Series 2020B Subordinate Bonds; No Credit Rating on Payment Decreases Under the Terms of the MSA ...... 35 Series 2020B Subordinate Bonds ...... 57 Declines in Cigarette Consumption ...... 40 LEGAL CONSIDERATIONS ...... 57 The Regulation of Tobacco Products by the FDA May Adversely Bankruptcy of a PM ...... 57 Affect Overall Consumption of Cigarettes in the U.S. and the Recharacterization of Transfer of County Tobacco Assets Could Operations of the PMs ...... 40 Void Transfer ...... 57 Concerns That Mentholated Cigarettes May Pose Greater Health Effect of Bankruptcy of the County on County Tobacco Assets ...... 57 Risks Could Result in Further Federal, State and Local MSA and Qualifying Statute Enforceability ...... 58

170 Limitations on Certain Opinions of Counsel ...... 58 Regulatory Issues ...... 103 Enforcement of Rights to Tobacco Settlement Revenues ...... 59 Civil Litigation ...... 120 No Assurance As to the Outcome of Litigation or Arbitration SUMMARY OF THE TOBACCO CONSUMPTION REPORT [to be Proceedings ...... 60 revised upon receipt] ...... 130 SUMMARY OF THE MASTER SETTLEMENT AGREEMENT ...... 60 General ...... 130 General ...... 60 Historical Cigarette Consumption ...... 130 Parties to the MSA ...... 60 Factors Affecting Cigarette Consumption ...... 131 Scope of Release ...... 62 Comparison with Prior Forecast ...... 131 Overview of Payments by the Participating Manufacturers; MSA DEPARTMENT OF FINANCE POPULATION FORECAST ...... 131 Escrow Agent ...... 63 CONTINUING DISCLOSURE UNDERTAKING ...... 132 Initial Payments ...... 63 LITIGATION ...... 132 Annual Payments ...... 64 TAX MATTERS ...... 132 Strategic Contribution Payments ...... 65 RATINGS ...... 134 Adjustments to Payments ...... 65 VERIFICATION OF MATHEMATICAL COMPUTATIONS ...... 135 Subsequent Participating Manufacturers ...... 69 UNDERWRITING ...... 135 Payments Made to Date ...... 69 LEGAL MATTERS ...... 136 Most Favored Nation Provisions ...... 70 OTHER PARTIES ...... 136 Disbursement of Funds from Escrow ...... 71 IHS Global ...... 136 Advertising and Marketing Restrictions; Educational Programs...... 71 Municipal Advisor ...... 136 Remedies Upon the Failure of a PM to Make a Payment ...... 71 Termination of MSA ...... 72 APPENDIX A – TOBACCO CONSUMPTION REPORT Severability ...... 72 Amendments and Waivers ...... 72 APPENDIX B – MASTER SETTLEMENT AGREEMENT MSA Provisions Relating to Model/Qualifying Statutes ...... 72 APPENDIX C – NPM ADJUSTMENT SETTLEMENT NPM Adjustment Claims and NPM Adjustment Settlement ...... 75 AGREEMENT, 2016 AND 2017 NPM ADJUSTMENTS STATE LAWS RELATED TO THE MSA ...... 84 SETTLEMENT AGREEMENT AND 2018 THROUGH 2022 California Qualifying Statute ...... 84 NPM ADJUSTMENTS SETTLEMENT AGREEMENT California Complementary Legislation ...... 85 APPENDIX D – THE CALIFORNIA CONSENT DECREE, THE State Statutory Enforcement Framework ...... 86 THE CALIFORNIA CONSENT DECREE, THE MOU, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT ...... 89 AGREEMENT General Description ...... 89 APPENDIX E – FORM OF OPINION OF BOND COUNSEL Flow of Funds and California Escrow Agreement ...... 89 APPENDIX F-1 – FORM OF INDENTURE AND SERIES 2020 Enforcement Provisions of the Consent Decree, the MOU and the SUPPLEMENT ARIMOU ...... 90 APPENDIX F-2 – FORM OF LOAN AGREEMENT Release and Dismissal of Claims...... 90 APPENDIX F-3 – SALE AGREEMENT CERTAIN INFORMATION RELATING TO THE DOMESTIC APPENDIX G – BOOK-ENTRY ONLY SYSTEM TOBACCO INDUSTRY...... 92 Industry Overview ...... 92 APPENDIX H – FORM OF CONTINUING DISCLOSURE Industry Market Share ...... 94 UNDERTAKING Cigarette Shipment Trends ...... 95 APPENDIX I – TABLE OF ACCRETED VALUES OF SERIES Physical Plant, Raw Materials, Distribution and Competition ...... 96 2020B SUBORDINATE BONDS E-Cigarettes and Vapor Products ...... 97 APPENDIX J – INDEX OF DEFINED TERMS Heat-Not-Burn Tobacco Products ...... 101 Smokeless Tobacco Products ...... 101

Smoking Cessation Products ...... 102 Gray Market ...... 103

171 SUMMARY STATEMENT

This Summary Statement is subject in all respects to more complete information contained in this Offering Circular and should not be considered a complete statement of the facts material to making an investment decision. The offering of the Series 2020 Bonds to potential investors is made only by means of the entire Offering Circular. Any statements in this Offering Circular involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Offering Circular is not to be construed as a contract or agreement between or among any of the Agency, the Corporation, the County, the Underwriter and the holders of the Series 2020 Bonds. Capitalized terms used in this Summary Statement and not otherwise defined shall have the meanings given such terms in the Indenture or the Sale Agreement, as applicable. See APPENDIX F-1 – “FORM OF INDENTURE AND SERIES 2020 SUPPLEMENT,” APPENDIX F-3 – “SALE AGREEMENT” and APPENDIX J – “INDEX OF DEFINED TERMS” attached hereto.

Overview The California County Tobacco Securitization Agency (the “Agency”) is issuing its $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020A (Senior) (the “Series 2020A Senior Bonds”), and $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-1 (Subordinate) (the “Series 2020B-1 Subordinate Bonds” Series 2020B-1 (Subordinate) (the “Series 2020B-1 Subordinate Bonds”) and $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-2 (Subordinate) (the “Series 2020B-2 Subordinate Bonds” ” and, together with the Series 2020B-1 Subordinate Bonds, the “Series 2020B Subordinate Bonds” ” and the Series 2020B Subordinate Bonds together with the Series 2020A Senior Bonds, the “Series 2020 Bonds”), pursuant to an Amended and Restated Indenture and a Series 2020 Supplement (collectively, the “Indenture”), each dated as of ______1, 2020, by and between the Agency and The Bank of New York Mellon Trust Company, N.A., a national banking association, as indenture trustee (the “Indenture Trustee”). The Agency will use the proceeds from the issuance of the Series 2020 Bonds, together with other available funds, to (i) refund on a current basis all of the Agency’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2006 (the “Series 2006 Bonds”) through defeasance and redemption, (ii) fund deposits to the Liquidity Reserve Accounts and Debt Service Accounts held under the Indenture, (iii) fund a payment to the registered owner of the Residual Certificate (as defined herein) for certain capital improvements of the County and (iv) pay costs of issuance in connection with the issuance of the Series 2020 Bonds. The Series 2020A Senior Bonds will be senior to the Series 2020B Subordinate Bonds in payment priority under the Indenture, as described herein. The Series 2020 Bonds, together with any Additional Bonds and Junior Bonds (each as defined herein) issued under the Indenture, are referred to herein as the “Bonds”.

Gold Country Settlement Funding Corporation, a California nonprofit, public benefit corporation (the “Corporation”), previously purchased the “County Tobacco Assets,” which consist of all right, title and interest of the County of Placer, California (the “County”) in and to the payments from and after May 1, 2003 required to be made to the State of California (the “State”) under the Master Settlement Agreement entered into on November 23, 1998 (the “MSA”) by participating cigarette manufacturers (the “PMs”), 46 states (including the State) and six other U.S. jurisdictions in settlement of certain cigarette smoking-related litigation, and made payable to the County pursuant to a Memorandum of Understanding (the “MOU”) and the Agreement Regarding Interpretation of Memorandum of Understanding (the “ARIMOU”), each among the State, various California cities and counties and certain other parties. The Corporation

* Preliminary, subject to change.

172 purchased the County Tobacco Assets from the County pursuant to a Sale Agreement, entered into as of June 1, 2002, as amended and restated as of June 1, 2006 (the “Sale Agreement”), by and between the County and the Corporation, with funds derived from a loan of the proceeds of the Agency’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2002 (which were refunded by the Series 2006 Bonds) made by the Agency to the Corporation pursuant to a Secured Loan Agreement, entered into as of June 1, 2002 (the “Prior Loan Agreement”), as amended and restated as of June 1, 2006, and as further amended and restated as of ______1, 2020 (as so amended and restated, the “Loan Agreement”), by and between the Agency, as lender, and the Corporation, as borrower.

The Bonds are payable solely from the payments by the Corporation to the Indenture Trustee under the Loan Agreement (the “Loan Payments”), the Corporation Tobacco Assets (as defined below), which include the County Tobacco Assets purchased from the County under the Sale Agreement, and the other Collateral (as defined below) pledged under the Indenture. See “SECURITY FOR THE BONDS.”

The Agency The Agency is a public entity created pursuant to a Joint Exercise of Powers Agreement, dated as of November 15, 2000, as amended, by and among the County and the counties of Merced, Kern, Stanislaus, Marin, Los Angeles, Fresno, Alameda and Sonoma, California (each, a “Member”). The Agency is a separate entity from the County, and its debts, liabilities and obligations do not constitute debts, liabilities or obligations of the County or its other Members. See “THE AGENCY.”

The Corporation The Corporation is a nonprofit, public benefit corporation organized under the California Nonprofit Public Benefit Corporation Law. See “THE CORPORATION.”

The County The County is a political subdivision in the State of California and is a separate entity from the Agency and the Corporation.

Securities Offered The Series 2020A Senior Bonds will be senior to the Series 2020B Subordinate Bonds in payment priority under the Indenture, as described herein. The Series 2020B Subordinate Bonds are Turbo Term Bonds. The Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds are Current Interest Bonds, and the Series 2020B Subordinate Bonds are Capital Appreciation Bonds. See “THE SERIES 2020 BONDS” herein.

The Series 2020A Senior Bonds and Series 2020B-1 Subordinate Bonds will be sold in denominations of $5,000 or any integral multiple thereof, and the Series 2020B Subordinate Bonds will be sold such that the Accreted Value thereof at the Maturity Date is in the denomination of $250,000 or any integral multiple of $5,000 in excess thereof.

The Series 2020B Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors. See “RISK FACTORS—Market for Series 2020B Subordinate Bonds; No Credit Rating on Series 2020B-2 Subordinate Bonds.”

It is expected that the Series 2020 Bonds will be delivered in book-entry form through the facilities of The Depository Trust Company, New York, New York (“DTC”), on or about ______, 2020 (the “Closing Date”). Beneficial owners of the Series 2020 Bonds will not receive physical delivery of the Series 2020 Bonds. See APPENDIX G – “BOOK-ENTRY ONLY SYSTEM” attached hereto.

173 Collateral The Series 2020 Bonds will be secured by the “Collateral,” which, as more fully described herein, means (a) the Loan Agreement, including but not limited to the right to receive Loan Payments and to enforce the obligations of the Corporation pursuant to the Loan Agreement; (b) the Corporation Tobacco Assets (as defined herein); (c) the Pledged Accounts, all money, instruments, investment property, or other property credited to or on deposit in the Pledged Accounts, and all investment earnings thereon; (d) all present and future claims, demands, causes and things in action in respect of any or all of the foregoing and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, and (e) all proceeds of the foregoing. Except as specifically provided in the Indenture, the Collateral does not include (i) the rights of the Agency pursuant to provisions for consent or other action by the Agency, notice to the Agency, indemnity of or the filing of documents with the Agency, or otherwise for its benefit and not for that of the Owners or (ii) the Rebate Account, and all money, instruments, investment property or other property credited to or on deposit in the Rebate Account.

Limited Obligations The Series 2020 Bonds are limited obligations of the Agency, payable from and secured solely by the Collateral pledged under the Indenture. The Owners have no recourse to other assets of the Agency, including, but not limited to, any assets pledged to secure payment of any other debt obligation of the Agency. If, notwithstanding the limitation on recourse described in the preceding sentence, any Owners are deemed to have an interest in any asset of the Agency pledged to the payment of other debt obligations of the Agency, the Owners’ interest in such asset shall be subordinate to the claims and rights of the holders of such other debt obligations, and the Indenture will constitute a subordination agreement for purposes of Section 510(a) of the U.S. Bankruptcy Code. The Series 2020 Bonds are not secured by the proceeds thereof, with the exception of the proceeds deposited in the Senior Liquidity Reserve Account (as defined herein) or the Subordinate Liquidity Reserve Accoount (as defined herein), as applicable.

The Series 2020 Bonds do not constitute a charge against the general credit of the Agency or any of its Members, including the County, and under no circumstances shall the Agency or any Member, including the County, be obligated to pay the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds, except from the Collateral pledged therefor under the Indenture. The Agency has no taxing power. Neither the credit of the State, nor of any public agency of the State (other than the Agency), nor of any Member of the Agency, including the County, is pledged to the payment of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds. The Series 2020 Bonds do not constitute a debt, liability or obligation of the State or any public agency of the State (other than the Agency) or any Member of the Agency, including the County. The County is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof. The Series 2020 Bonds do not constitute a debt, liability or obligation of the Corporation, and the Corporation is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof.

Loan Agreement Pursuant to the Loan Agreement, the Agency has loaned the proceeds of the Series 2020 Bonds to the Corporation to provide funds to assist the Corporation in refinancing the acquisition of the County Tobacco Assets and to make a payment to the registered owner of the Residual Certificate. Under the Loan Agreement, the Corporation has agreed to pay or cause to be paid to the Indenture Trustee, for deposit in the Collections Account, Loan Payments consisting of the “Tobacco Settlement Revenues,” which are the payments pursuant to the MSA, the MOU, the ARIMOU and the Consent Decree made on the County Tobacco Assets, when and as such are received. Pursuant

174 to the Loan Agreement, as security for the Loan and any obligations related thereto, the Corporation has pledged and assigned to the Agency and granted to the Agency a first priority perfected security interest in all right, title and interest of the Corporation, whether now owned or hereafter acquired, in, to and under the following property: (a) the County Tobacco Assets purchased from the County; (b) to the extent permitted by law, corresponding present or future rights, if any, of the Corporation to enforce or cause the enforcement of payment of such purchased County Tobacco Assets pursuant to the MOU and the ARIMOU; (c) the corresponding rights of the Corporation under the Sale Agreement; and (d) all proceeds of any and all of the foregoing (collectively and severally, the “Corporation Tobacco Assets”). Pursuant to the Indenture, the Agency has granted to the Indenture Trustee a first lien and security interest in the Collateral, which includes all of the Agency’s right, title, and interest in the Loan Agreement (except as otherwise provided in the Indenture), including but not limited to the right to receive Loan Payments and to enforce the obligations of the Corporation pursuant to the Loan Agreement.

Master Settlement Agreement On November 23, 1998, the MSA was entered into by 46 states (including the State), the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Commonwealth of the Northern Mariana Islands (collectively, the “Settling States”) and what were then the four largest United States tobacco manufacturers: Philip Morris Incorporated (now Philip Morris USA Inc., “Philip Morris”), R.J. Reynolds Tobacco Company (“Reynolds Tobacco”), Brown & Williamson Tobacco Corporation (“B&W”) and Lorillard Tobacco Company (“Lorillard”). In January 2004, Inc. (“Reynolds American”) was incorporated as a holding company to facilitate the combination of the U.S. assets, liabilities and operations of B&W with those of Reynolds Tobacco. On June 12, 2015, Reynolds American acquired Lorillard, Inc., of which Lorillard was a wholly-owned subsidiary, and Lorillard was merged into Reynolds Tobacco, with Reynolds Tobacco as the surviving entity. Contemporaneous with Reynolds American’s acquisition of Lorillard, Inc., Imperial Tobacco Group PLC, currently named PLC (“Imperial Tobacco”), purchased certain of Reynolds Tobacco’s and certain of Lorillard’s cigarette brands, among other assets. The payment obligations under the MSA follow tobacco product brands if they are transferred; thus, Imperial Tobacco is required to make payments under the MSA as a result of its acquisition of those cigarette brands. On July 25, 2017, Reynolds American became a wholly-owned subsidiary of p.l.c. (“BAT”) following BAT’s acquisition of the approximately 58% of Reynolds American stock not then owned by BAT. As a result of such acquisition, BAT is responsible for Reynolds Tobacco’s payment obligations under the MSA.

References herein to the “Original Participating Manufacturers” or “OPMs” means (i) prior to July 30, 2004, collectively, Philip Morris, Reynolds Tobacco, B&W and Lorillard, (ii) after July 30, 2004 and prior to June 12, 2015, collectively Philip Morris, Reynolds Tobacco and Lorillard, and (iii) on and after June 12, 2015, Philip Morris and Reynolds Tobacco, along with Imperial Tobacco with respect to those cigarette brands that Imperial Tobacco acquired from Reynolds Tobacco and Lorillard. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY— Industry Overview.” The MSA provides for tobacco companies, other than the OPMs, to become parties to the MSA (“Subsequent Participating Manufacturers” or “SPMs”).

The MSA is an industry-wide settlement of litigation between the OPMs and SPMs (collectively, the “Participating Manufacturers” or “PMs”) and the Settling States, and resolved cigarette smoking-related litigation among the Settling States and the OPMs, released the PMs from past and present smoking-related claims by the Settling

175 States and provides for a continuing release of future smoking-related claims by the Settling States in exchange for certain payments to be made to the Settling States. The MSA also provides for the imposition of certain tobacco advertising and marketing restrictions, among other things. Neither the Agency, the County, nor the Corporation are parties to the MSA. “See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT.”

MSA Payments Under the MSA, the OPMs are required to pay to the Settling States: (i) five initial payments (the “Initial Payments”) (all of which have been previously made by the OPMs), (ii) annual payments (the “Annual Payments”), which are required to be made annually on each April 15, having commenced April 15, 2000, and continuing in perpetuity (subject to adjustment as described herein), and (iii) ten annual payments of $861 million (subject to adjustment as described herein) that were required to be made on each April 15 in the years 2008 through 2017 (the “Strategic Contribution Payments”). SPMs are also required to make Annual Payments (and were also required to make Strategic Contribution Payments) in certain circumstances. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Subsequent Participating Manufacturers.” Most of the PMs have made the Annual Payments due in 2000 through, and including, 2020, and Strategic Contribution Payments due in 2008 through, and including, 2017, which was the last year in which such Strategic Contribution Payments were due (subject, in each case, to certain withholdings and payments into the Disputed Payments Account), as described under “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT — Overview of Payments by the Participating Manufacturers; MSA Escrow Agent.”

The Annual Payments that are due under the MSA are subject to numerous adjustments, some of which are material. Such adjustments include reductions when the PMs experience a loss of market share to tobacco companies that do not become part of the MSA (“Non-Participating Manufacturers” or “NPMs”), as a result of the PMs’ participation in the MSA (the “NPM Adjustment”). The NPM Adjustment has been the subject of disputes between Settling States and PMs since at least 2004. As discussed further herein, the State was one of several jurisdictions to enter into settlements with the OPMs and certain SPMs regarding claims related to the 2003 through 2022 NPM Adjustments and the determination of subsequent NPM Adjustments. See “RISK FACTORS—Payment Decreases Under the Terms of the MSA,” “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT— Adjustments to Payments” and “—NPM Adjustment Claims and NPM Adjustment Settlement,” APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” AND “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT.”

Other adjustments to payments due under the MSA include reductions for decreased domestic cigarette shipments, reductions for amounts paid by OPMs to four states which had previously settled their claims against the PMs independently of the MSA, and increases related to inflation of not less than 3% each year, and offsets for disputed and/or miscalculated payments, as described herein.

Under the MSA, each OPM is required to pay an allocable portion of each Annual Payment based on its relative market share of cigarettes shipped in the United States by the OPMs during the preceding calendar year. Each SPM has Annual Payment obligations under the MSA (separate from the payment obligations of the OPMs) according to its market share (as determined in accordance with the MSA, “Market Share”). However, any SPM that became a party to the MSA within 90 days after it

176 became effective pays only if its Market Share exceeds the higher of its 1998 Market Share or 125% of its 1997 Market Share.

Payments by the PMs are required to be made to Citibank, N.A., as the MSA Escrow Agent appointed pursuant to the MSA (the “MSA Escrow Agent”), which is required, in turn, to remit an allocable share of such payments to the parties entitled thereto. The MSA Escrow Agent has distributed the payments due under the MSA through April 15, 2020 to the Settling States.

Under the MSA, the State is entitled to 12.7639554% of the Annual Payments made by PMs under the MSA and distributed through the National Escrow Agreement, entered into on December 23, 1998 (the “National Escrow Agreement”), among the Settling States, the OPMs and the MSA Escrow Agent. By operation of the MOU and the ARIMOU, the State has allocated 50% of such payments to the Participating Jurisdictions (as defined below) and retained the remaining 50%. See “SUMMARY STATEMENT — California Consent Decree, the MOU, the ARIMOU and the California Escrow Agreement” below. See also “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT” herein.

California Consent Decree, the MOU, the ARIMOU and the California Escrow Agreement On December 9, 1998, a Consent Decree and Final Judgment (the “Consent Decree”) was entered in the Superior Court of the State of California for San Diego County. The Consent Decree is final and non-appealable. Prior to the entering of the Consent Decree, the plaintiffs of certain pending cases agreed, among other things, to coordinate their pending cases and to allocate certain portions of the recovery among the State, its counties, the Cities of San Jose, Los Angeles and San Diego and the City and County of San Francisco (the “Participating Jurisdictions”). This agreement was memorialized in the MOU, by and among counsel representing the State and various counsel representing a number of the Participating Jurisdictions. To set forth the understanding of the interpretation to be given to the terms of the MOU and to establish procedures for the resolution of any future disputes that may arise regarding the interpretation of the MOU among the State and the Participating Jurisdictions, the parties entered into the ARIMOU.

Under the MOU, 45% of the State’s entire allocation of tobacco settlement payments under the MSA is allocated to the Participating Jurisdictions that are counties, 5% is allocated to the four cities that are Participating Jurisdictions (1.25% each), and the remaining 50% is allocated to the State. The 45% share of the tobacco settlement payments allocated to the Participating Jurisdictions that are counties is allocated among the counties based on the proportion of each county’s population to the total State population as reported in the 1990 Official United States Decennial Census, as adjusted every ten years by the Official United States Decennial Census. Pursuant to the proportional allocable share provided in the MOU and the ARIMOU, the County is currently entitled to receive 0.420880% of the total statewide share of the tobacco settlement payments (based on adjustments made to reflect the 2010 Official United States Decennial Census). This percentage is subject to adjustments for population changes every ten years based on the Official United States Decennial Census as described herein. See “THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT” and “RISK FACTORS—Potential Payment Adjustments for Population Changes Under the MOU and the ARIMOU” herein.

Under the MSA, the State’s portion of the tobacco settlement payments is deposited into the California State-Specific Account held by the MSA Escrow Agent. Pursuant

177 to the terms of the MOU, the ARIMOU and the Escrow Agreement, dated April 12, 2000, as amended (the “California Escrow Agreement”), between the State and Citibank, N.A., as escrow agent (the “California Escrow Agent”), the State has instructed the MSA Escrow Agent to transfer (upon receipt thereof) all amounts in the California State-Specific Account to the California Escrow Agent. The California Escrow Agent is required to deposit the State’s 50% share of the tobacco settlement payments into an account for the benefit of the State (the “California State Government Escrow Account”), and the remaining 50% of the tobacco settlement payments into separate sub-accounts of an account for the benefit of the Participating Jurisdictions or as otherwise directed by the local jurisdiction (this account is referred to herein as the “California Local Government Escrow Account”). The MOU provides that the distribution of tobacco-related recoveries is not subject to alteration by legislative, judicial or executive action at any level, and, if such alteration were to occur and survive legal challenge, any modification would be borne proportionally by the State and the Participating Jurisdictions. The County has irrevocably instructed the California Escrow Agent to disburse the Tobacco Settlement Revenues from the California Local Government Escrow Account directly to the Indenture Trustee. See “THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT” and APPENDIX D — “THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT.”

Industry Overview Philip Morris and Reynolds Tobacco (both OPMs) are the largest manufacturers of cigarettes in the United States (based on 2019 market share). The market for cigarettes is highly competitive and is characterized by brand recognition. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY.”

As reported by the National Association of Attorneys General (“NAAG”), based upon OPM shipments reported to Management Science Associates, Inc., an independent third-party database management organization that collects wholesale shipment data (“MSAI”), the OPMs accounted for approximately 81.11%* of the U.S. domestic cigarette market in payment year 2020 (sales year 2019), measuring roll-your-own cigarettes at 0.0325 ounces per cigarette conversion rate. Also as reported by NAAG, based upon shipments reported to MSAI, the SPMs accounted for approximately 10.23%* of the U.S. domestic cigarette market in payment year 2020 (sales year 2019), measuring roll-your-own cigarettes at 0.09 ounces per cigarette conversion rate.

* OPMs make payments under the MSA based upon the 0.0325 ounce per cigarette conversion rate, and SPMs make payments under the MSA based upon the 0.09 ounce per cigarette conversion rate. The aggregate market share information is based on information as reported by NAAG and may differ materially from the market share information as reported by the OPMs for purposes of their filings with the Securities and Exchange Commission. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY.” The aggregate market share information from NAAG used in the Tobacco Settlement Revenues Projection Methodology and Assumptions may differ materially in the future from the market share information used by the MSA Auditor in calculating the adjustments to MSA payments in future years. See “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” and “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments.”

178 Cigarette Consumption As described in the Tobacco Consumption Report referred to below, domestic cigarette consumption grew dramatically in the 20th century, reaching a peak of 640 billion cigarettes in 1981. Consumption declined in the 1980s, 1990s, 2000s and 2010s, falling to less than 400 billion cigarettes in 2003 and 264.5 billion cigarettes in 2014, before increasing slightly to 269.6 billion cigarettes in 2015 and then decreasing to 258.9 billion cigarettes in 2016, 247.5 billion cigarettes in 2017, 235.9 billion cigarettes in 2018 and 224.2 billion cigarettes in 2019. The Tobacco Consumption Report projects that consumption declines will continue in subsequent years. See “SUMMARY OF THE TOBACCO CONSUMPTION REPORT” herein and APPENDIX A – “TOBACCO CONSUMPTION REPORT” attached hereto.

Tobacco Consumption Report IHS Global Inc. (“IHS Global”) has prepared a report dated ______, 2020 on the consumption of cigarettes in the United States from 2020 through 2055 entitled, “A Forecast of U.S. Cigarette Consumption (2020-2055) for the California County Tobacco Securitization Agency (Gold Country Settlement Funding Corporation)” (the “Tobacco Consumption Report”).

IHS Global’s cigarette consumption model is based on historical United States data between 1965 and 2019. In the Tobacco Consumption Report, IHS Global has projected the average annual rate of decline in U.S. cigarette consumption from 2020 through 2055 to be approximately 3.3%, resulting in a forecast of total U.S. cigarette consumption in 2055 to be 68.3 billion cigarettes, including a roll-your-own equivalent of 0.0325 ounces per cigarette (a 70% decline from the 2019 level). The projections and forecasts regarding future cigarette consumption included in the Tobacco Consumption Report are estimates which have been prepared on the basis of certain assumptions and hypotheses. No representation or warranty of any kind is or can be made with respect to the accuracy or completeness of, and no representation or warranty should be inferred from, these projections and forecasts. See “SUMMARY OF THE TOBACCO CONSUMPTION REPORT” and APPENDIX A — “TOBACCO CONSUMPTION REPORT.” See also “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.”

Department of Finance Population Forecast In January 2020, the Department of Finance of the State of California (the “Department of Finance”) prepared estimates of the population of the State and all of its counties (including the County) for July 1, 2010 through 2019 and projections of the population of the State and all of its counties (including the County) for July 1, 2020 through 2060, in one-year increments (the “Population Forecast”). The Population Forecast has been used in making certain projections of payments under the MOU and the ARIMOU. The Population Forecast is an estimate which was prepared by the Department of Finance on the basis of certain assumptions and hypotheses, including regarding fertility, mortality and migration. No representation or warranty of any kind is or can be made with respect to the accuracy or completeness of, and no representation or warranty should be inferred from, these projections and forecasts. See “DEPARTMENT OF FINANCE POPULATION FORECAST,” “RISK FACTORS— Potential Payment Adjustments for Population under the MOU and the ARIMOU” and “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.”

Interest and Principal or Accreted Value The Series 2020 Bonds will bear or accrete interest at the respective rates per annum as described on the inside cover page of this Offering Circular and as further described herein. Interest on the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds will be payable semi-annually on June 1 and December 1 of each year (each, a “Distribution Date”), commencing [*June 1, 2021*]. Interest on the Series 2020B-2

179 Subordinate Bonds will not be paid currently but will accrete in value, compounded semiannually on each Distribution Date, commencing [*June 1, 2021*] (to become part of Accreted Value as more fully described herein), from the initial principal amount on the date of delivery thereof to maturity or earlier redemption, at the Accretion Rate (as defined herein) thereof, specified in APPENDIX I — “TABLE OF ACCRETED VALUES OF SERIES 2020B SUBORDINATE BONDS.” In the event that a Series 2020B Subordinate Bond remains Outstanding after its Maturity Date, such Bond will accrue and pay interest at its Default Rate (as defined herein) from its Maturity Date. Interest on the Series 2020 Bonds will be calculated on the basis of a year of 360 days and twelve 30-day months.

Principal or Accreted Value is payable on the Series 2020 Bonds on their respective scheduled Maturity Dates as set forth on the inside cover page hereof (and, with respect to the Series 2020A Senior Bonds that are Term Bonds, on the Sinking Fund Installment dates, as described herein). Principal or Accreted Value is also payable on the Series 2020B Subordinate Bonds by Turbo Redemptions (as defined herein), to the extent of Turbo Available Collections (as defined herein), as described below.

Failure to pay the full amount of interest on the Series 2020 Bonds when due or the full amount of principal of a Series 2020 Bond on its scheduled Maturity Date (or Sinking Fund Installment Date) is an Event of Default under the Indenture, in which case all subsequent payments will be made as described in “SECURITY FOR THE BONDS— Flow of Funds—Payment Defaults”; however, a payment default with respect to the Series 2020A Senior Bonds will not result in acceleration of any of the Series 2020 Bonds, and a payment default with respect to the Series 2020B Subordinate Bonds will not result in acceleration of the Series 2020A Senior Bonds but will result in extraordinary payment of the Series 2020B Subordinate Bonds, as described further herein.

Turbo Redemption of Series 2020B Subordinate The Indenture requires that Turbo Available Collections (as defined herein), if any, as Bonds described in “SECURITY FOR THE BONDS—Flow of Funds,” be applied from the Turbo Redemption Account to the redemption of the Series 2020B Subordinate Bonds on each Distribution Date, in whole or in part, at the principal amount or Accreted Value thereof being redeemed, without premium, following notice of such redemption in accordance with the Indenture (each such redemption, a “Turbo Redemption”). Moneys available for each such Turbo Redemption will be applied to redeem the Series 2020B Subordinate Bonds in chronological order of scheduled maturity. Turbo Redemptions are not scheduled amortization payments, and are required to be made only from Turbo Available Collections, if any. The ratings on the Series 2020B-1 Subordinate Bonds do not address the payment of Turbo Redemptions on such Bonds. The Series 2020B-2 Subordinate Bonds are not rated. Amounts in the Subordinate Liquidity Reserve Account are not available to make Turbo Redemptions. Failure to make Turbo Redemptions will not constitute a Subordinate Payment Default or any other Event of Default under the Indenture to the extent that such failure results from the insufficiency of Turbo Available Collections.

For a schedule of projected Turbo Redemptions, see the table entitled “Projected Series 2020 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds” in “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” herein (“Projected Turbo Redemptions”). See “THE SERIES 2020 BONDS — Turbo Redemption of Series 2020B Subordinate Bonds.”

180 Mandatory Redemption of Series 2020A Senior Term Bonds by Sinking Fund Installments The Series 2020A Senior Bonds maturing on June 1, 20__* are Term Bonds that are subject to mandatory redemption in part on June 1 of the years and in the principal amounts equal to the respective Sinking Fund Installments as described herein under “THE SERIES 2020 BONDS — Mandatory Redemption of Series 2020A Senior Term Bonds by Sinking Fund Installments.” Failure to pay Sinking Fund Installments on the Series 2020A Senior Bonds is an Event of Default under the Indenture. See “SECURITY FOR THE BONDS — Events of Default; Remedies.”

Optional Redemption The Series 2020B-1 Subordinate Bonds and the Series 2020B-2 Subordinate Bonds are each subject to redemption (from any source other than moneys in the Pledged Accounts) at the option of the Agency at the direction of the Corporation, (x) in the case of the Series 2020B-1 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the principal amount being redeemed, plus interest accrued to the redemption date, and (y) in the case of the Series 2020B-2 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the Accreted Value being redeemed on the redemption date, in each case in whole or in part from any maturity selected by the Agency at the direction of the Corporation in its discretion, in applicable Authorized Denominations, at any time, but only in an amount that may not exceed the cumulative amount of the Projected Turbo Redemptions that were projected to be paid but, as of the date of such redemption, have not been paid with respect to such Series 2020B-1 Subordinate Bonds or Series 2020B-2 Subordinate Bonds, as applicable. See the table entitled “Projected Series 2020 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds” in “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” herein.

In addition, the Series 2020A Senior Bonds and the Series 2020B Subordinate Bonds are each subject to redemption (from any source other than moneys in the Pledged Accounts) at the option of the Agency at the direction of the Corporation, (x) in the case of the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the principal amount being redeemed, plus interest accrued to the redemption date, and (y) in the case of the Series 2020B-2 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the Accreted Value being redeemed on the redemption date, in each case in whole or in part, in applicable Authorized Denominations, on any date on or after June 1, 20__*, from any maturity selected by the Agency at the direction of the Corporation in its discretion, and within a maturity on such basis as the Indenture Trustee shall deem fair and appropriate, including by lot; provided, however, that, with respect to Series 2020A Senior Bonds that are Term Bonds, the Agency at the direction of the Corporation may, in its discretion, select the Sinking Fund Installments called for redemption.

Extraordinary Payment of Series 2020B Subordinate Bonds Following a Subordinate Payment Default Beginning on the Distribution Date immediately following the occurrence of any failure to pay when due any principal of or interest on any Subordinate Bonds (as defined more fully herein, “Subordinate Payment Default”) and continuing on each succeeding Distribution Date thereafter, the Indenture Trustee shall apply all funds in the

* Preliminary, subject to change.

181 Subordinate Extraordinary Payment Account, the Subordinate Debt Service Account (if any), the Turbo Redemption Account (if any) and the Subordinate Liquidity Reserve Account (if any), in that order, to make “Extraordinary Payments,” which are payments (or prepayments) with respect to the Subordinate Bonds, Pro Rata (as defined herein), without regard to their order of maturity, in the following order: (i) past due interest on the Subordinate Bonds, (ii) accrued and unpaid interest on the Subordinate Bonds, and (iii) principal or Accreted Value of the Subordinate Bonds without premium. See “SECURITY FOR THE BONDS—Flow of Funds—Payment Defaults.”

Mandatory Redemption from Lump Sum Payments and Total Lump Sum Payments The Series 2020 Bonds shall be redeemed in whole or in part prior to their stated maturity, following notice of such redemption in accordance with the Indenture, at a redemption price equal to 100% of the principal amount or Accreted Value thereof being redeemed, without premium, (i) on any Distribution Date from Lump Sum Payments on deposit in the Lump Sum Redemption Account and (ii) on the earliest practicable Business Day from Total Lump Sum Payments on deposit in the Lump Sum Redemption Account.

“Lump Sum Payment” means a payment from a PM that results in, or is due to, a release of that PM from all or a portion of its future payment obligations under the MSA. For the purposes of the Indenture (and not for purposes of the Sale Agreement), the term “Lump Sum Payment” does not include any payments that are Total Lump Sum Payments, any non-scheduled prepayments other than a Lump Sum Payment or any payments made with respect to prior payment obligations. “Total Lump Sum Payment” means a payment (or a set of payments received after a Distribution Date but prior to the succeeding Distribution Date) that is (or collectively are) a final payment under the MSA from all of the PMs that results in, or is due to, a release of all of the PMs from all of their future payment obligations under the MSA. For the avoidance of doubt, the Corporation Tobacco Assets include, without limitation, all Lump Sum Payments and all Total Lump Sum Payments.

Clean-Up Call Redemption Optional Clean-Up Call of Senior Bonds. The Senior Bonds are subject to optional redemption in whole, on any Distribution Date, at a redemption price equal to one hundred percent (100%) of the principal amount being redeemed plus interest accrued to the redemption date, without premium, when the available amounts on deposit in the Pledged Accounts allocable to the Senior Bonds exceed the aggregate principal amount of, and accrued interest on, all Outstanding Senior Bonds. “Senior Bonds” means the Series 2020A Senior Bonds and any Additional Bonds secured on parity with the Series 2020A Senior Bonds.

Mandatory Clean-Up Call of Subordinate Bonds. The Subordinate Bonds are subject to mandatory redemption in whole, on any Distribution Date, at a redemption price equal to one hundred percent (100%) of the principal amount or Accreted Value being redeemed plus interest accrued to the redemption date, without premium, when the available amounts on deposit in the Pledged Accounts allocable to the Subordinate Bonds exceed the aggregate principal amount or Accreted Value of, and accrued interest on, all Outstanding Subordinate Bonds. “Subordinate Bonds” means the Series 2020B Subordinate Bonds and any Additional Bonds secured on parity with the Series 2020B Subordinate Bonds.

Limitation on Open Market Purchases Pursuant to the Indenture, moneys in any Pledged Account shall not be used to make open market purchases of Turbo Term Bonds (including the Series 2020B Subordinate Bonds). Moneys in the Surplus Account may be used to make open market purchases

182 of Senior Bonds (including the Series 2020A Senior Bonds). Any Senior Bonds so purchased shall be delivered to the Indenture Trustee for cancellation.

Bond Structuring Assumptions and Methodology The Series 2020 Bonds were structured on the basis of forecasts, which themselves are based on assumptions, as described herein. Among these are a forecast of United States cigarette consumption contained in the Tobacco Consumption Report, a forecast of future population in the County based on the Population Forecast available from the Department of Finance, a forecast of the application of certain adjustments and offsets to payments to be made by the PMs pursuant to the MSA (including an assumption that there will not be an NPM Adjustment), and a forecast of the Accounts established under the Indenture and all earnings on amounts on deposit therein. In addition, such forecasts were used to project amounts expected to be available for redemption of the Series 2020B Subordinate Bonds from Turbo Redemptions and the resulting expected average life of such Bonds.

No assurance can be given, however, that events will occur in accordance with such assumptions and forecasts. Any deviations from such assumptions and forecasts could materially and adversely affect the payment of the Series 2020 Bonds. See “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein.

183 Liquidity Reserve Accounts A reserve account (the “Senior Liquidity Reserve Account”) will be established and maintained by the Indenture Trustee under the Indenture and funded on the Closing Date in an amount equal to $______* as security for the Series 2020A Senior Bonds (and any other Senior Bonds that may be issued). The “Senior Liquidity Reserve Requirement” is, for as long as any Senior Bonds are Outstanding, an amount equal to $______*, and otherwise $0; provided, however, that at the option of the Agency, with a Rating Confirmation for any Bonds which are then rated by a Rating Agency, the Senior Liquidity Reserve Requirement applicable on and after June 1, 20__* may be changed to an amount equal to “Maximum Annual Senior Debt Service” (as of any date, the greatest aggregate amount payable in the then-current calendar year or any future calendar year in respect of principal, Sinking Fund Installments and interest on Senior Bonds) each year for as long as any Senior Bonds are Outstanding, and otherwise $0. A second reserve account (the “Subordinate Liquidity Reserve Account” and, together with the Senior Liquidity Reserve Account, the “Liquidity Reserve Accounts”) will be established and maintained by the Indenture Trustee under the Indenture and funded on the Closing Date in an amount equal to $______* as security for the Series 2020B-1 Subordinate Bonds (and any other Subordinate Bonds designated to be secured by such Account that may be issued). “Subordinate Bonds” means the Series 2020B Subordinate Bonds and any Additional Bonds secured on parity with the Series 2020B Subordinate Bonds. The Subordinate Liquidity Reserve Account does not secure the Series 2020B-2 Subordinate Bonds. The “Subordinate Liquidity Reserve Requirement” is an amount equal to $______*, for as long as any Series 2020B-1 Subordinate Bonds are Outstanding, and an amount equal to $0 when no Series 2020B-1 Subordinate Bonds are Outstanding, which amount may (but is not required to) be amended upon the issuance of Additional Bonds that constitute Subordinate Bonds in accordance with the applicable Series Supplement. The Senior Liquidity Reserve Requirement and the Subordinate Liquidity Reserve Requirement are collectively referred to herein as the “Liquidity Reserve Requirements”. The Agency is required to maintain the applicable Liquidity Reserve Requirement in the applicable Liquidity Reserve Account, to the extent of funds available for such purpose pursuant to the Indenture. See “SECURITY FOR THE BONDS—Flow of Funds.”

Amounts on deposit in the Senior Liquidity Reserve Account will be available to pay interest on the Series 2020A Senior Bonds, and principal on the respective scheduled Maturity Dates and Sinking Fund Installment dates of the Series 2020A Senior Bonds, to the extent available Collections are insufficient for such purpose. Amounts on deposit in the Subordinate Liquidity Reserve Account will be available to pay interest on the Series 2020B-1 Subordinate Bonds, and principal on the respective scheduled Maturity Dates of the Series 2020B-1 Subordinate Bonds, to the extent available Collections are insufficient for such purpose. Amounts in the Subordinate Liquidity Reserve Account will not be available to make Turbo Redemptions of the Series 2020B-1 Subordinate Bonds. The Subordinate Liquidity Reserve Account does not secure the Series 2020B-2 Subordinate Bonds. Unless an Event of Default has occurred, Collections (to the extent available) will be used to replenish the applicable Liquidity Reserve Account to the applicable Liquidity Reserve Requirement. Any amounts remaining in the applicable Liquidity Reserve Account in excess of the respective Liquidity Reserve Requirement will be deposited as described herein. When no Senior Bonds remain Outstanding, if any Subordinate Bonds remain Outstanding then the balance (if any) on deposit in the Senior Liquidity Reserve Account shall be transferred to the Collections Account. See “SECURITY FOR THE BONDS.”

* Preliminary, subject to change.

184 Flow of Funds “Collections” means all funds collected with respect to Tobacco Settlement Revenues. Pursuant to the Indenture, the Indenture Trustee shall deposit all Collections in the Collections Account promptly upon receipt (except for Lump Sum Payments and Total Lump Sum Payments, which shall be transferred promptly, and, in any event, no later than the Business Day immediately preceding the next following Distribution Date, to the Lump Sum Redemption Account). At any time after making all transfers described above but no later than five Business Days prior to each Distribution Date, the Indenture Trustee shall withdraw Collections on deposit in the Collections Account, including any investment earnings thereon, and transfer to the Operating Account the amounts specified by an Officer’s Certificate delivered pursuant to the Indenture in order to pay (x) Operating Expenses to the extent that the amount thereof does not exceed, together with amounts previously drawn during the then current calendar year from the Collections Account for such purpose, the Operating Cap for the then current calendar year, and (y) the Tax Obligations, if any, specified in an Officer’s Certificate. No later than three Business Days prior to each Distribution Date, the Indenture Trustee shall transfer from the Senior Liquidity Reserve Account to the Senior Debt Service Account any amount in excess (or anticipated to be in excess) of the Senior Liquidity Reserve Requirement as of such Distribution Date and, unless a Subordinate Payment Default has occurred, from the Subordinate Liquidity Reserve Account to the Subordinate Debt Service Account, any amount in excess (or anticipated to be in excess) of the Subordinate Liquidity Reserve Requirement. After making the transfers described above and no later than two Business Days prior to each Distribution Date, the Indenture Trustee shall withdraw the Collections on deposit in the Collections Account, including any investment earnings thereon, and transfer such amounts as described in “SECURITY FOR THE BONDS – Flow of Funds.”

Events of Default An “Event of Default” under the Indenture means any one of the following events: (a) a Senior Payment Default; (b) a Subordinate Payment Default; (c) failure of the Agency to observe or perform any covenant, condition, agreement, or provision contained in the Bonds or in the Indenture (other than a failure in the preceding clause (a) or (b) above and other than the Agency’s covenant to comply with the Continuing Disclosure Undertaking), which breach is not remedied within 60 days after Written Notice, specifying such default and requiring the same to be remedied, shall have been given to the Agency by the Indenture Trustee or by the Owners of at least 25% in principal amount or Accreted Value of the Bonds then Outstanding; provided, however, if the default be such that it cannot be corrected within the said 60-day period, it shall not constitute an Event of Default if corrective action is instituted by the Agency within said 60-day period and diligently pursued until the default is corrected; and (d) an event of default has occurred and is continuing under the Loan Agreement.

Notwithstanding the foregoing, a Subordinate Payment Default (i) shall not cause any Senior Bonds to be deemed to be in default if the payment of all interest and principal then due on such Senior Bonds has been timely paid, and (ii) until no Senior Bonds shall remain Outstanding, shall not give rise to any of the remedies described in “SECURITY FOR THE BONDS — Events of Default; Remedies — Remedies Available to the Indenture Trustee” being available to cure any such nonpayment of Subordinate Bonds.

185 See “SECURITY FOR THE BONDS — Events of Default; Remedies” herein for a discussion of the remedies available to the Indenture Trustee upon the occurrence of an Event of Default. See “SECURITY FOR THE BONDS — Flow of Funds — Payment Defaults” for a discussion of the application of Collections following a Senior Payment Default and the Extraordinary Payments on the Series 2020B Subordinate Bonds following a Subordinate Payment Default.

Additional Bonds “Additional Bonds” are Bonds (including Refunding Bonds), other than the Series 2020 Bonds and any Junior Bonds, issued pursuant to the Indenture. Refunding Bonds may be issued to refund all Bonds in whole (including the funding of defeasance escrows and deposits to Accounts in connection with such issuance). Additional Bonds may also be issued for any other lawful purpose at the discretion of the Agency, including Refunding Bonds issued to refund Bonds in part (including the funding of defeasance escrows and deposits to Accounts in connection with such issuance), but only if upon the issuance of such Additional Bonds: (A) no Event of Default shall have occurred and is continuing with respect to (x) if such Additional Bonds proposed to be issued are Senior Bonds, the Senior Bonds then Outstanding or (y) if such Additional Bonds proposed to be issued are Subordinate Bonds, the Subordinate Bonds then Outstanding; (B) the expected weighted average life of each Turbo Term Bond that will remain Outstanding after the date of issuance of the Additional Bonds as computed by the Agency on the basis of new projections on the date of issuance of the Additional Bonds will not exceed (x) the remaining expected weighted average life of each such Turbo Term Bond as computed by the Agency on the basis of such new projections on the date of issuance of the Additional Bonds assuming that no such Additional Bonds are issued plus (y) one year; and (C) a Rating Confirmation is received for any Bonds which are then rated by a Rating Agency that will remain Outstanding after the date of issuance of the Additional Bonds. See “SECURITY FOR THE BONDS – Additional Bonds” herein.

Junior Bonds One or more Series of Bonds (the “Junior Bonds”) may be issued for any lawful purpose if there is no payment permitted for such Bonds until all previously issued Senior Bonds and Subordinate Bonds are Fully Paid (as defined herein). Junior Bonds may be issued without satisfying the requirements of the Indenture for Additional Bonds. See “SECURITY FOR THE BONDS – Junior Bonds” herein.

Covenants The County, the Corporation and the Agency have made certain covenants for the benefit of the Owners. See APPENDIX F-1 – “FORM OF INDENTURE AND SERIES 2020 SUPPLEMENT” attached hereto for the covenants made by the Agency, APPENDIX F-2 – “FORM OF LOAN AGREEMENT” attached hereto for the covenants made by the Corporation, and APPENDIX F-3 – “SALE AGREEMENT” attached hereto for the covenants made by the County.

Continuing Disclosure In order to assist the Underwriter in complying with Rule 15c2-12(b)(5) (the “Rule”) of the U.S. Securities and Exchange Commission, pursuant to a Continuing Disclosure Certificate (the “Continuing Disclosure Undertaking”), the Agency will agree to provide, or cause to be provided, to the Municipal Securities Rulemaking Board, on its Electronic Municipal Market Access (“EMMA”) system, certain annual financial information and operating data and, in a timely manner, notice of certain listed events. See “CONTINUING DISCLOSURE UNDERTAKING” and APPENDIX H — “FORM OF CONTINUING DISCLOSURE UNDERTAKING.”

Ratings The ratings for the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds address only (i) the payment of interest on such Bonds, when due, and (ii) the payment of principal of such Bonds by their Maturity Dates (and, with respect to the Series 2020A Senior Bonds that are Term Bonds, Sinking Fund Installment dates). The payment of Turbo Redemptions on the Series 2020B-1 Subordinate Bonds has not been

186 rated by S&P Global Ratings (“S&P”). The Series 2020B-2 Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors. See “RISK FACTORS—Market for Series 2020B-2 Subordinate Bonds; No Credit Rating on Series 2020B-2 Subordinate Bonds.” A rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time. See “RATINGS” herein.

Risk Factors and Legal Considerations Reference is made to “RISK FACTORS” and “LEGAL CONSIDERATIONS” herein for a description of certain risks and considerations relevant to an investment in the Series 2020 Bonds.

Tax Matters In the opinion of Norton Rose Fulbright US LLP, Bond Counsel to the Agency, under existing statutes, regulations, rulings and judicial decisions, (i) assuming compliance by the Agency, the Corporation and the County with certain covenants in the Indenture and other documents pertaining to the Series 2020 Bonds, interest on the Series 2020 Bonds is not included in the gross income of the owners of the Series 2020 Bonds for federal income tax purposes and (ii) interest on the Series 2020 Bonds is not treated as an item of tax preference for purposes of the federal alternative minimum tax. Failure to comply with such covenants and requirements may cause interest on the Series 2020 Bonds to be included in gross income retroactive to the date of issuance of the Series 2020 Bonds. Bond Counsel expresses no opinion with respect to any collateral tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Series 2020 Bonds. See “TAX MATTERS.”

Availability of Documents Included herein are brief summaries of certain documents and reports, which summaries do not purport to be complete or definitive, and reference is made to such documents and reports for full and complete statements of the contents thereof. Copies of the Indenture, the Loan Agreement and the Sale Agreement may be obtained upon request from the Indenture Trustee at: The Bank of New York Mellon Trust Company, N.A., 400 S. Street, Suite 500, Los Angeles, California 90071, Attention: Corporate Trust Department.

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188 INTRODUCTORY STATEMENT

This Offering Circular sets forth information concerning the issuance by The California County Tobacco Securitization Agency (the “Agency”) of its $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020A (Senior) (the “Series 2020A Senior Bonds”), and $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-1 (Subordinate) (the “Series 2020B- 1 Subordinate Bonds” Series 2020B-1 (Subordinate) (the “Series 2020B-1 Subordinate Bonds”) and $______* Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-2 (Subordinate) (the “Series 2020B-2 Subordinate Bonds” ” and, together with the Series 2020B-1 Subordinate Bonds, the “Series 2020B Subordinate Bonds” ” and the Series 2020B Subordinate Bonds together with the Series 2020A Senior Bonds, the “Series 2020 Bonds”), pursuant to an Amended and Restated Indenture and a Series 2020 Supplement (collectively, the “Indenture”), each dated as of ______1, 2020, by and between the Agency and The Bank of New York Mellon Trust Company, N.A., a national banking association, as indenture trustee (the “Indenture Trustee”). The Agency will use the proceeds from the issuance of the Series 2020 Bonds, together with other available funds, to (i) refund on a current basis all of the Agency’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2006 (the “Series 2006 Bonds”)*] through defeasance and redemption, (ii) fund deposits to the Liquidity Reserve Accounts and Debt Service Accounts held under the Indenture Accounts held under the Indenture, (iii) fund a payment to the registered owner of the Residual Certificate (as defined herein) for certain capital improvements of the County and (iv) pay costs of issuance in connection with the issuance of the Series 2020 Bonds. The Series 2020A Senior Bonds will be senior to the Series 2020B Subordinate Bonds in payment priority under the Indenture, as described herein. The Series 2020 Bonds, together with any Additional Bonds and Junior Bonds (each as defined herein) issued under the Indenture, are referred to herein as the “Bonds”. See “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS.”

The Agency is a public entity created pursuant to a Joint Exercise of Powers Agreement, dated as of November 15, 2000, as amended, by and among the County of Placer, California (the “County”) and eight other counties in the State of California (each, a “Member”). The Agency is a separate entity from the County, and its debts, liabilities and obligations do not constitute debts, liabilities or obligations of the County or its other Members.

Gold Country Settlement Funding Corporation, a California nonprofit, public benefit corporation (the “Corporation”), previously purchased the “County Tobacco Assets,” which are all right, title and interest of the County in and to the payments from and after May 1, 2003 required to be made to the State of California (the “State”) under the MSA (as defined below) and made payable to the County pursuant to the MOU and the ARIMOU (each as defined below). The Corporation purchased the County Tobacco Assets from the County pursuant to a Sale Agreement, entered into as of June 1, 2002, as amended and restated as of June 1, 2006 (the “Sale Agreement”), by and between the County and the Corporation, with funds derived from a loan of the proceeds of the Agency’s Tobacco Settlement Asset-Backed Bonds (Gold Country Settlement Funding Corporation) Series 2002 (which were refunded by the Series 2006 Bonds) made by the Agency to the Corporation pursuant to a Secured Loan Agreement, entered into as of June 1, 2002 (the “Prior Loan Agreement”), as amended and restated as of June 1, 2006, and as further amended and restated as of ______1, 2020 (as so amended and restated, the “Loan Agreement”), by and between the Agency, as lender, and the Corporation, as borrower.

The Bonds are payable solely from the payments by the Corporation to the Indenture Trustee under the Loan Agreement (the “Loan Payments”), the Corporation Tobacco Assets (as defined herein), which include the County Tobacco Assets purchased from the County under the Sale Agreement, and the other Collateral (as defined herein) pledged under the Indenture. Pursuant to the Indenture, the Agency has granted to the Indenture Trustee a first lien and security interest in the Collateral, which includes all of the Agency’s right, title, and interest in the Loan Agreement (except as otherwise provided in the Indenture), including but not limited to the right to receive Loan Payments and to enforce the obligations of the Corporation pursuant to the Loan Agreement.

The Master Settlement Agreement (the “MSA”), which was entered into on November 23, 1998, among the attorneys general of 46 states (including the State), the District of Columbia, the Commonwealth of Puerto Rico,

* Preliminary, subject to change.

189 Guam, the U.S. Virgin Islands, American Samoa and the Commonwealth of the Northern Mariana Islands (collectively, the “Settling States”) and the then four largest United States tobacco manufacturers (namely, Philip Morris Incorporated (now Philip Morris USA Inc., “Philip Morris”), R.J. Reynolds Tobacco Company (“Reynolds Tobacco”), Brown & Williamson Tobacco Corporation (“B&W”) and Lorillard Tobacco Company (“Lorillard”) (collectively, the “Original Participating Manufacturers” or “OPMs,” which term also includes Imperial Brands PLC (formerly named Imperial Tobacco Group PLC) with respect to those cigarette brands that it acquired from Reynolds Tobacco and Lorillard)), resolved all cigarette smoking-related litigation between the Settling States and the OPMs, released the OPMs and the tobacco companies that become parties to the MSA after the OPMs (the “Subsequent Participating Manufacturers” or “SPMs,” and together with the OPMs, the “Participating Manufacturers” or “PMs”) from past and present cigarette smoking-related claims by the Settling States, and provides for a continuing release of future cigarette smoking-related claims by the Settling States in exchange for payments to be made to the Settling States, as well as, among other things, certain tobacco advertising and marketing restrictions. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY” for a discussion of certain information relating to the PMs and the domestic tobacco industry.

Under the MSA, the base amounts of Annual Payments (as defined herein) payable by the PMs thereunder are subject to various adjustments, offsets and recalculations, including the “NPM Adjustment,” which operates in the event of losses in Market Share (as defined herein) by PMs to tobacco companies that are not parties to the MSA (“Non-Participating Manufacturers” or “NPMs”), as a result of such PMs’ participation in the MSA. As discussed further herein, the State was one of several jurisdictions to enter into settlements with the OPMs and certain SPMs regarding claims related to the 2003 through 2022 NPM Adjustments and the determination of subsequent NPM Adjustments. See “RISK FACTORS—Payment Decreases Under the Terms of the MSA,” “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments” and “— NPM Adjustment Claims and NPM Adjustment Settlement,” APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” AND “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT.”

Under the MSA, as modified by the Memorandum of Understanding (the “MOU”) as agreed to by the State and its counties, the Cities of San Jose, Los Angeles and San Diego and the City and County of San Francisco (the “Participating Jurisdictions”), and the Agreement Regarding Interpretation of Memorandum of Understanding, as amended, among the State, all counties and certain cities within the State (the “ARIMOU”), the 45% share of the statewide tobacco settlement payments allocated to the Participating Jurisdictions that are counties is allocated among the counties based on the proportion of each county’s population to the total State population as reported in the 1990 Official United States Decennial Census, as adjusted every ten years by the Official United States Decennial Census. Pursuant to the proportional allocable share provided in the MOU and the ARIMOU, the County is currently entitled to receive 0.420880% of the total statewide share of the tobacco settlement payments (based on adjustments made to reflect the 2010 Official United States Decennial Census). The allocations prior to the respective Maturity Dates of the Series 2020 Bonds are subject to adjustments for population changes based on the 2020, 2030, 2040 and 2050 Official United States Decennial Census, as applicable.

The Series 2020 Bonds are limited obligations of the Agency, payable from and secured solely by the Collateral pledged under the Indenture. The Owners have no recourse to other assets of the Agency, including, but not limited to, any assets pledged to secure payment of any other debt obligation of the Agency. If, notwithstanding the limitation on recourse described in the preceding sentence, any Owners are deemed to have an interest in any asset of the Agency pledged to the payment of other debt obligations of the Agency, the Owners’ interest in such asset shall be subordinate to the claims and rights of the holders of such other debt obligations, and the Indenture will constitute a subordination agreement for purposes of Section 510(a) of the U.S. Bankruptcy Code. The Series 2020 Bonds are not secured by the proceeds thereof, with the exception of the proceeds deposited in the Senior Liquidity Reserve Account or the Subordinate Liquidity Reserve Account (each as defined herein), as applicable.

The Series 2020 Bonds do not constitute a charge against the general credit of the Agency or any of its Members, including the County, and under no circumstances shall the Agency or any Member, including the County, be obligated to pay the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds, except from the Collateral pledged therefor under the Indenture. The Agency has no taxing power. Neither the credit of the State, nor of any public agency of the State (other than the Agency),

190 nor of any Member of the Agency, including the County, is pledged to the payment of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds. The Series 2020 Bonds do not constitute a debt, liability or obligation of the State or any public agency of the State (other than the Agency) or any Member of the Agency, including the County. The County is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof. The Series 2020 Bonds do not constitute a debt, liability or obligation of the Corporation, and the Corporation is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof.

Interest on the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds will be payable semi- annually on June 1 and December 1 of each year (each, a “Distribution Date”), commencing [*June 1, 2021*]. Interest on the Series 2020B Subordinate Bonds will not be paid currently but will accrete in value, compounded semiannually on each Distribution Date, commencing [*June 1, 2021*] (to become part of Accreted Value as more fully described herein), from the initial principal amount on the date of delivery thereof to maturity or earlier redemption, at the Accretion Rate (as defined herein) thereof, specified in APPENDIX I — “TABLE OF ACCRETED VALUES OF SERIES 2020B SUBORDINATE BONDS.” Principal or Accreted Value is payable on the Series 2020 Bonds on their respective scheduled Maturity Dates as set forth on the inside cover page hereof (and, with respect to the Series 2020A Senior Bonds that are Term Bonds, on the Sinking Fund Installment dates). Principal or Accreted Value is also payable on the Series 2020B Subordinate Bonds by Turbo Redemptions, to the extent of Turbo Available Collections, as described herein. Failure to pay Turbo Redemptions on the Series 2020B Subordinate Bonds will not constitute a Subordinate Payment Default or any other Event of Default under the Indenture to the extent that such failure results from the insufficiency of Turbo Available Collections. The Series 2020A Senior Bonds are subject to optional redemption and optional clean-up call, and the Series 2020B Subordinate Bonds are subject to optional redemption and mandatory clean-up call, each as described herein. The Series 2020B Subordinate Bonds are subject to Extraordinary Payments in the event of a Subordinate Payment Default, as described herein. See “SECURITY FOR THE BONDS” and “THE SERIES 2020 BONDS”.

Certain methodologies and assumptions were used to establish the amounts and scheduled Maturity Dates of the Series 2020 Bonds and the projected Turbo Redemptions of the Series 2020B Subordinate Bonds. See “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” and “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.” In addition, the amount and timing of payments on the Series 2020 Bonds may be affected by various factors. See “RISK FACTORS” and “LEGAL CONSIDERATIONS.” The Series 2020B-2 Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors.

SECURITY FOR THE BONDS

Sale Agreement

Pursuant to the Sale Agreement, the Corporation purchased from the County the County Tobacco Assets, which are all of the County’s right, title and interest in, to and under the MOU, the ARIMOU, the MSA and the Consent Decree, including the rights of the County to be paid the money due to it under the MOU, the ARIMOU, the MSA and the Consent Decree from and after May 1, 2003. The Corporation purchased the County Tobacco Assets from the County with funds derived from a loan of the proceeds of the Series 2002 Bonds made by the Agency to the Corporation pursuant to the Prior Loan Agreement.

Pursuant to the Sale Agreement, the County irrevocably instructed the Attorney General of the State pursuant to the ARIMOU to cause the California Escrow Agent to disburse all of the County Tobacco Assets from the California Local Government Escrow Account to the Indenture Trustee. See APPENDIX F-3 – “SALE AGREEMENT” attached hereto.

191 Loan Agreement

Pursuant to the Loan Agreement, the Agency has loaned the proceeds of the Series 2020 Bonds to the Corporation to provide funds to assist the Corporation in refinancing the acquisition of the County Tobacco Assets and to make a payment to the registered owner of the Residual Certificate. Under the Loan Agreement, the Corporation has agreed to pay or cause to be paid to the Indenture Trustee, for deposit in the Collections Account, Loan Payments consisting of the “Tobacco Settlement Revenues,” which are the payments pursuant to the MSA, the MOU, the ARIMOU and the Consent Decree made on the County Tobacco Assets, when and as such are received. Pursuant to the Loan Agreement, as security for the Loan and any obligations related thereto, the Corporation has pledged and assigned to the Agency and granted to the Agency a first priority perfected security interest in all right, title and interest of the Corporation, whether now owned or hereafter acquired, in, to and under the following property: (a) the County Tobacco Assets purchased from the County; (b) to the extent permitted by law, corresponding present or future rights, if any, of the Corporation to enforce or cause the enforcement of payment of such purchased County Tobacco Assets pursuant to the MOU and the ARIMOU; (c) the corresponding rights of the Corporation under the Sale Agreement; and (d) all proceeds of any and all of the foregoing (collectively and severally, the “Corporation Tobacco Assets”). See APPENDIX F-2 – “FORM OF LOAN AGREEMENT” attached hereto. Pursuant to the Indenture, the Agency has granted to the Indenture Trustee a first lien and security interest in the Collateral, which includes all of the Agency’s right, title, and interest in the Loan Agreement (except as otherwise provided in the Indenture), including but not limited to the right to receive Loan Payments and to enforce the obligations of the Corporation pursuant to the Loan Agreement.

Collateral under the Indenture

The Bonds (including the Series 2020 Bonds) are secured by all of the Agency’s right, title, and interest, whether now owned or hereafter acquired, in, to, and under the Collateral. “Collateral” is defined under the Indenture as (a) the Loan Agreement, including but not limited to the right to receive Loan Payments and to enforce the obligations of the Corporation pursuant to the Loan Agreement; (b) the Corporation Tobacco Assets; (c) the Pledged Accounts, all money, instruments, investment property, or other property credited to or on deposit in the Pledged Accounts, and all investment earnings thereon; (d) all present and future claims, demands, causes and things in action in respect of any or all of the foregoing and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, including all proceeds of the conversion, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts, general intangibles, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, condemnation awards, rights to payment of any and every kind, and other forms of obligations and receivables, instruments and other property which at any time constitute all or part of or are included in the proceeds of any of the foregoing and (e) all proceeds of the foregoing. Except as specifically provided in the Indenture, the Collateral does not include (i) the rights of the Agency pursuant to provisions for consent or other action by the Agency, notice to the Agency, indemnity of or the filing of documents with the Agency, or otherwise for its benefit and not for that of the Owners or (ii) the Rebate Account, and all money, instruments, investment property or other property credited to or on deposit in the Rebate Account. None of the proceeds of the Bonds or any earnings therefrom, unless deposited into one of the Pledged Accounts, shall in any way be pledged to the payment of the Bonds, and such amounts shall not be part of the Collateral. See APPENDIX F-1 – “FORM OF INDENTURE AND SERIES 2020 SUPPLEMENT” attached hereto.

The “Pledged Accounts” are the Collections Account (except to the extent that money therein is allocable to the Operating Account, the Operating Contingency Account or the Rebate Account), the Debt Service Accounts, the Liquidity Reserve Accounts, the Lump Sum Redemption Account, the Turbo Redemption Account and the Subordinate Extraordinary Payment Account (and all subaccounts contained in the named accounts).

Liquidity Reserve Accounts

A reserve account (the “Senior Liquidity Reserve Account”) will be established and maintained by the Indenture Trustee under the Indenture and funded on the Closing Date in an amount equal to $______* as security for the Series 2020A Senior Bonds (and any other Senior Bonds that may be issued). “Senior Bonds” means the

* Preliminary, subject to change.

192 Series 2020A Senior Bonds and any Additional Bonds secured on parity with the Series 2020A Senior Bonds. The “Senior Liquidity Reserve Requirement” is, for as long as any Senior Bonds are Outstanding, an amount equal to $______*, and otherwise $0; provided, however, that at the option of the Agency, with a Rating Confirmation for any Bonds which are then rated by a Rating Agency, the Senior Liquidity Reserve Requirement applicable on and after June 1, 20__* may be changed to an amount equal to “Maximum Annual Senior Debt Service” (as of any date, the greatest aggregate amount payable in the then-current calendar year or any future calendar year in respect of principal, Sinking Fund Installments and interest on Senior Bonds) each year for as long as any Senior Bonds are Outstanding, and otherwise $0. A second reserve account (the “Subordinate Liquidity Reserve Account” and, together with the Senior Liquidity Reserve Account, the “Liquidity Reserve Accounts”) will be established and maintained by the Indenture Trustee under the Indenture and funded on the Closing Date in an amount equal to $______* as security for the Series 2020B-1 Subordinate Bonds (and any other Subordinate Bonds designated to be secured by such Account that may be issued). “Subordinate Bonds” means the Series 2020B Subordinate Bonds and any Additional Bonds secured on parity with the Series 2020B Subordinate Bonds. The Subordinate Liquidity Reserve Account does not secure the Series 2020B-2 Subordinate Bonds. The “Subordinate Liquidity Reserve Requirement” is an amount equal to $______*, for as long as any Series 2020B-1 Subordinate Bonds are Outstanding, and an amount equal to $0 when no Series 2020B-1 Subordinate Bonds are Outstanding, which amount may (but is not required to) be amended upon the issuance of Additional Bonds that constitute Subordinate Bonds in accordance with the applicable Series Supplement. The Senior Liquidity Reserve Requirement and the Subordinate Liquidity Reserve Requirement are collectively referred to herein as the “Liquidity Reserve Requirements”. The Agency is required to maintain the applicable Liquidity Reserve Requirement in the applicable Liquidity Reserve Account, to the extent of funds available for such purpose pursuant to the Indenture. See “—Flow of Funds” below.

Amounts on deposit in the Senior Liquidity Reserve Account will be available to pay interest on the Series 2020A Senior Bonds, and principal on the respective scheduled Maturity Dates and Sinking Fund Installment dates of the Series 2020A Senior Bonds, to the extent available Collections are insufficient for such purpose. Amounts on deposit in the Subordinate Liquidity Reserve Account will be available to pay interest on the Series 2020B-1 Subordinate Bonds, and principal on the respective scheduled Maturity Dates of the Series 2020B-1 Subordinate Bonds, to the extent available Collections are insufficient for such purpose. Amounts in the Subordinate Liquidity Reserve Account will not be available to make Turbo Redemptions of the Series 2020B-1 Subordinate Bonds. The Subordinate Liquidity Reserve Account does not secure the Series 2020B-2 Subordinate Bonds. Unless an Event of Default has occurred, Collections (to the extent available) will be used to replenish the applicable Liquidity Reserve Account to the applicable Liquidity Reserve Requirement. Any amounts remaining in the applicable Liquidity Reserve Account in excess of the respective Liquidity Reserve Requirement will be deposited as described in “—Flow of Funds” below. When no Senior Bonds remain Outstanding, if any Subordinate Bonds remain Outstanding then the balance (if any) on deposit in the Senior Liquidity Reserve Account shall be transferred to the Collections Account.

Defeasance

Total Defeasance. When (i) there is held, by or for the account of the Indenture Trustee, Defeasance Collateral in such principal amounts, bearing interest at such fixed rates and with such maturities, including any applicable redemption premiums, as will provide sufficient funds to pay, or to redeem in accordance with the Indenture, all obligations to Owners in whole (to be verified by a nationally recognized firm of independent verification agents), (ii) any required notice of redemption shall have been duly given in accordance with the Indenture or irrevocable instructions to give notice shall have been given to the Indenture Trustee, (iii) all the rights under the Indenture of the Fiduciaries have been provided for, and (iv) the Indenture Trustee shall have received an opinion of Counsel to the effect that such defeasance will not, in and of itself, result in the inclusion of interest on any Outstanding Tax-Exempt Bonds in gross income for federal income tax purposes, then upon Written Notice from the Agency to the Indenture Trustee, such Owners shall cease to be entitled to any benefit or security under the Indenture except the right to receive payment of the funds so held and other rights which by their nature cannot be satisfied prior to or simultaneously with termination of the lien of the Indenture, the security interests created by the Indenture (except in such funds and investments) shall terminate, and the Agency, after providing for all Operating Expenses, and the Indenture Trustee shall execute and deliver such instruments as may be necessary to discharge the Indenture Trustee’s lien and security interests created under the Indenture and to make the Tobacco Settlement Revenues and other Collateral payable to the order of the Agency. Upon such defeasance, the funds and investments required to pay or redeem the Bonds shall be irrevocably set aside for that purpose, subject, however, to the unclaimed money provisions of the Indenture, and money held for defeasance shall be invested only as described above and applied by the Indenture

193 Trustee and other Paying Agents, if any, to the retirement of the Bonds. Upon the discharge of the Indenture Trustee’s lien and security interest created under the Indenture, the Indenture Trustee shall cooperate in delivering instructions to the Attorney General of the State to instruct the California Escrow Agent to transfer the Tobacco Settlement Revenues to or upon the order of the Corporation.

Partial Defeasance. Subject to the requirements of the Agency’s tax covenants in the Indenture, the Agency may create a defeasance escrow for the retirement and defeasance of any Bonds subject to and in accordance with the provisions regarding total defeasance described above, except that the obligations to all Owners need not be satisfied in whole and the lien and security interest of the Indenture Trustee under the Indenture for the benefit of the Bonds which have not been defeased shall not terminate. Thereafter, the Owners of such Defeased Bonds shall cease to be entitled to any benefit or security under the Indenture except the right to receive payment of the funds held in such defeasance escrow and other rights that by their nature cannot be satisfied prior to or simultaneously with termination of the lien of the Indenture.

Limited Obligations

The Bonds are limited obligations of the Agency, payable from and secured solely by the Collateral pledged under the Indenture. The Owners have no recourse to other assets of the Agency, including, but not limited to, any assets pledged to secure payment of any other debt obligation of the Agency. If, notwithstanding the limitation on recourse described in the preceding sentence, any Owners are deemed to have an interest in any asset of the Agency pledged to the payment of other debt obligations of the Agency, the Owners’ interest in such asset shall be subordinate to the claims and rights of the holders of such other debt obligations, and the Indenture will constitute a subordination agreement for purposes of Section 510(a) of the U.S. Bankruptcy Code. The Bonds are not secured by the proceeds thereof, with the exception of the proceeds deposited in the Senior Liquidity Reserve Account or the Subordinate Liquidity Reserve Account, as applicable.

The Bonds do not constitute a charge against the general credit of the Agency or any of its Members, including the County, and under no circumstances shall the Agency or any Member, including the County, be obligated to pay the principal or Accreted Value of, or redemption premium, if any, or interest on the Bonds, except from the Collateral pledged therefor under the Indenture. The Agency has no taxing power. Neither the credit of the State, nor of any public agency of the State (other than the Agency), nor of any Member of the Agency, including the County, is pledged to the payment of the principal or Accreted Value of or redemption premium, if any, or interest on, the Bonds. The Bonds do not constitute a debt, liability or obligation of the State or any public agency of the State (other than the Agency) or any Member of the Agency, including the County. The County is under no obligation to make payments of the principal or Accreted Value of or redemption premium, if any, or interest on the Bonds in the event that Collections are insufficient for the payment thereof. The Bonds do not constitute a debt, liability or obligation of the Corporation, and the Corporation is under no obligation to make payments of the principal or Accreted Value of or redemption premium, if any, or interest on the Bonds in the event that Collections are insufficient for the payment thereof.

Flow of Funds

Pursuant to the Indenture, the Indenture Trustee shall deposit all Collections in the Collections Account promptly upon receipt; provided, however, that until all amounts due under the Indenture shall have been paid or otherwise provided for in accordance with the provisions regarding total defeasance, all Collections that have been identified by an Officer’s Certificate delivered to the Indenture Trustee as consisting of Lump Sum Payments or Total Lump Sum Payments shall be transferred promptly (and, in any event, no later than the Business Day immediately preceding the next following Distribution Date) to the Lump Sum Redemption Account and applied as described in “—Prepayment from Lump Sum Payments” or “—Prepayment from Total Lump Sum Payments” below, as applicable, in accordance with the instructions received by the Indenture Trustee pursuant to an Officer’s Certificate. “Lump Sum Payment” means a payment from a PM that results in, or is due to, a release of that PM from all or a portion of its future payment obligations under the MSA. For the purposes of the Indenture (and not for purposes of the Sale Agreement), the term “Lump Sum Payment” does not include any payments that are Total Lump Sum Payments, any non-scheduled prepayments other than a Lump Sum Payment or any payments made with respect to prior payment obligations. “Total Lump Sum Payment” means a payment (or a set of payments received after a Distribution Date but prior to the succeeding Distribution Date) that is (or collectively are) a final payment under the MSA from all of

194 the PMs that results in, or is due to, a release of all of the PMs from all of their future payment obligations under the MSA. For the avoidance of doubt, the Corporation Tobacco Assets include, without limitation, all Lump Sum Payments and all Total Lump Sum Payments.

Transfers to Accounts

At any time after making all transfers to the Lump Sum Redemption Account as described above but no later than five Business Days prior to each Distribution Date, the Indenture Trustee shall withdraw Collections on deposit in the Collections Account, including any investment earnings thereon, and transfer to the Operating Account the amounts specified by an Officer’s Certificate delivered pursuant to the Indenture in order to pay (x) Operating Expenses to the extent that the amount thereof does not exceed, together with amounts previously drawn during the then current calendar year from the Collections Account for such purpose, the Operating Cap for the then current calendar year, and (y) the Tax Obligations, if any, specified in an Officer’s Certificate. “Operating Cap” means (a) (i) $______in the Fiscal Year ending June 30, 2022, (ii) in each following Fiscal Year, the Operating Cap for the prior Fiscal Year inflated by the greater of 3% or the percentage increase in the consumer price index for all Urban Consumers as published by the Bureau of Labor Statistics for the prior calendar year, plus (b) in each Fiscal Year, Tax Obligations specified in an Officer’s Certificate.

No later than three Business Days prior to each Distribution Date, the Indenture Trustee shall make the following transfers:

(i) from the Senior Liquidity Reserve Account to the Senior Debt Service Account, any amount in excess (or anticipated to be in excess (as determined by an Officer’s Certificate)) of the Senior Liquidity Reserve Requirement as of such Distribution Date pursuant to the Indenture; and

(ii) unless a Subordinate Payment Default has occurred, from the Subordinate Liquidity Reserve Account to the Subordinate Debt Service Account, any amount in excess (or anticipated to be in excess (as determined by an Officer’s Certificate)) of the Subordinate Liquidity Reserve Requirement pursuant to the Indenture.

After making the transfers described above and no later than two Business Days prior to each Distribution Date, the Indenture Trustee shall withdraw the Collections on deposit in the Collections Account, including any investment earnings thereon, and transfer such amounts as follows:

(i) to the Senior Debt Service Account, an amount sufficient to cause the amount therein to equal unpaid interest due on the Outstanding Senior Bonds on the next Distribution Date;

(ii) to the Senior Debt Service Account, an amount sufficient to cause the amount therein (without regard to amounts on deposit therein pursuant to clause (i) above) to equal the principal of Outstanding Senior Bonds due on or prior to the next Distribution Date;

(iii) to the Senior Debt Service Account, an amount sufficient to cause the amount therein (without regard to amounts on deposit therein pursuant to clauses (i) and (ii) above), together with any additional amounts in excess of the Senior Liquidity Reserve Requirement required to be transferred or anticipated to be transferred (as determined by an Officer’s Certificate) from the Senior Liquidity Reserve Account to the Senior Debt Service Account as described above, to equal interest due on Outstanding Senior Bonds on the second succeeding Distribution Date;

(iv) to the Senior Liquidity Reserve Account, an amount sufficient to cause the amount therein to equal the Senior Liquidity Reserve Requirement;

(v) if a Subordinate Payment Default has occurred, to the Subordinate Extraordinary Payment Account all amounts remaining in the Collections Account up to the amount required to fully retire all of the Outstanding Subordinate Bonds on the next succeeding Distribution Date, including all interest and principal or Accreted Value thereon;

195 (vi) to the Subordinate Debt Service Account, an amount sufficient to cause the amount therein to equal interest due on Outstanding Subordinate Bonds on the next Distribution Date;

(vii) to the Subordinate Debt Service Account, an amount sufficient to cause the amount therein (without regard to amounts on deposit therein pursuant to clause (vi) above), to equal the principal or Accreted Value of Outstanding Subordinate Bonds due on or prior to the next Distribution Date;

(viii) to the Subordinate Debt Service Account, an amount sufficient to cause the amount therein (without regard to amounts on deposit therein pursuant to clauses (vi) and (vii) above), together with any additional amounts in excess of the Subordinate Liquidity Reserve Requirement required to be transferred or anticipated to be transferred (as determined by an Officer’s Certificate) from the Subordinate Liquidity Reserve Account as described above, to equal interest due on Outstanding Subordinate Bonds on the second succeeding Distribution Date (taking into account Turbo Redemption Payments projected to be made on the next succeeding Distribution Date pursuant to clause (vi) under “—Distribution Date Transfers” below);

(ix) to the Subordinate Liquidity Reserve Account, an amount sufficient to cause the amount therein to equal the Subordinate Liquidity Reserve Requirement;

(x) to the Operating Contingency Account, the amount, if any, necessary to make the amount therein equal to the amount specified by the Officer’s Certificate most recently delivered or deemed delivered pursuant to the Indenture in order to pay, for the twelve-month period applicable to such Officer’s Certificate, the Operating Expenses in excess of the Operating Cap;

(xi) to the Turbo Redemption Account, all amounts remaining in the Collections Account up to the amount necessary to redeem all then Outstanding Subordinate Bonds that are subject to Turbo Redemption on such Distribution Date (such amounts, “Turbo Available Collections”); and

(xii) to the Surplus Account, all amounts remaining in the Collections Account, which, pursuant to the written direction of the Corporation, may either (i) be applied to redeem Senior Bonds or make open market purchases of Senior Bonds pursuant to the Indenture to the extent that Senior Bonds are then Outstanding, or (ii) be paid to the Residual Trust and clear of the lien of the Indenture.

“Residual Trust” means the trust established by the Corporation pursuant to the Declaration and Agreement of Trust relating to the Residual Trust by and between BNY Mellon Trust of Delaware (formerly named The Bank of New York (Delaware)), as trustee, and the Corporation, dated as of June 1, 2002, as such agreement may be amended and restated pursuant to the provisions thereof (the “Trust Agreement”), and which, as a result of its registered ownership of the Residual Certificate held in accordance with the Trust Agreement (as such certificate may be amended and restated from time to time, the “Residual Certificate”), is entitled to receive the revenues of the Corporation that are in excess of the Corporation’s expenses, debt service and contractual obligations pursuant to the Loan Agreement.

Distribution Date Transfers

On each Distribution Date, the Indenture Trustee shall apply amounts in the various Accounts in the following order of priority:

(i) from the Senior Debt Service Account and the Senior Liquidity Reserve Account, in that order, to pay interest on the Outstanding Senior Bonds due on such Distribution Date;

(ii) from the Senior Debt Service Account and the Senior Liquidity Reserve Account, in that order, to pay principal of Outstanding Senior Bonds due on or prior to such Distribution Date in chronological order of the date on which such principal is due Pro Rata in respect of the amount of principal due on each such principal due date;

(iii) if a Subordinate Payment Default has occurred, from the Subordinate Extraordinary Payment Account, the Subordinate Debt Service Account, the Turbo Redemption Account and the Subordinate Liquidity

196 Reserve Account, in that order, if any, to pay Extraordinary Payments pursuant to the Indenture as described in “— Payment Defaults” below;

(iv) from the Subordinate Debt Service Account and the Subordinate Liquidity Reserve Account, in that order, to pay interest on the Outstanding Subordinate Bonds due on such Distribution Date;

(v) from the Subordinate Debt Service Account and the Subordinate Liquidity Reserve Account, in that order, to pay principal or Accreted Value of Outstanding Subordinate Bonds due on such Distribution Date in chronological order of the date on which such principal or Accreted Value is due Pro Rata in respect of the amount of principal due on each such principal due date;

(vi) from the Operating Contingency Account, the amount, if any, to pay the Operating Expenses in excess of the Operating Cap for the twelve-month period applicable to the most recently delivered or deemed delivered Officer’s Certificate; and

(vii) from the Turbo Redemption Account, to make Turbo Redemption Payments on Subordinate Turbo Term Bonds in accordance with the Indenture.

“Pro Rata” means, for an allocation of available amounts to any payment of interest, principal or Accreted Value to be made under the Indenture, the application of a fraction to such available amounts (a) the numerator of which is equal to the amount due to the respective Owners to whom such payment is owing, and (b) the denominator of which is equal to the total amount due to all Owners to whom such payment is owing; provided, that only with respect to any payment of principal or Accreted Value to be made Pro Rata under the Indenture, such payment shall be made Pro Rata to the extent possible, and then any remaining balance of such payment of principal shall be allocated by lot, or as specified in a Series Supplement, in each case in applicable Authorized Denominations.

Payment Defaults

Senior Payment Default. Beginning on the Distribution Date immediately following the occurrence of any failure to pay when due any principal of or interest on any Senior Bonds, including any failure to pay when due any Serial Maturity, Sinking Fund Installment or Term Bond Maturity (each as defined herein) with respect to any Senior Bonds (a “Senior Payment Default”) and continuing on each succeeding Distribution Date until such Senior Payment Default is cured, after making any transfers to the Operating Account required under the Indenture, all Collections will be applied solely to funding the Senior Debt Service Account, and replenishing the Senior Liquidity Reserve Account, until all payments of interest on, Sinking Fund Installments on, and maturing principal of the Senior Bonds are current and all such Accounts fully funded as contemplated as described in “—Transfers to Accounts” (second and third paragraphs) and “—Distribution Date Transfers” above.

Subordinate Payment Default. Upon the occurrence of any failure to pay when due any principal of or interest on any Subordinate Bonds, including any failure to pay when due any Turbo Term Bond Maturity with respect to any Subordinate Bonds (a “Subordinate Payment Default”; for the avoidance of doubt, failure to make Turbo Redemptions with respect to any Turbo Term Bonds, including the Series 2020B-1 Subordinate Bonds and the Series 2020B-2 Subordinate Bonds, will not constitute a Subordinate Payment Default or any other Event of Default to the extent that such failure results from the insufficiency of Turbo Available Collections) and continuing on each succeeding Distribution Date commencing with the Distribution Date following the Subordinate Payment Default, the Indenture Trustee shall apply all funds in the Subordinate Extraordinary Payment Account, the Subordinate Debt Service Account (if any), the Turbo Redemption Account (if any) and the Subordinate Liquidity Reserve Account (if any), in that order, to make “Extraordinary Payments,” which are payments (or prepayments) with respect to the Subordinate Bonds, Pro Rata, without regard to their order of maturity, in the following order: (i) past due interest on the Subordinate Bonds, (ii) accrued and unpaid interest on the Subordinate Bonds, and (iii) principal or Accreted Value of the Subordinate Bonds without premium. For the avoidance of doubt, accrued and unpaid interest pursuant to an Extraordinary Payment with respect to any Capital Appreciation Bond is only payable after such Bond’s Maturity Date or Conversion Date as appropriate.

197 Prepayment from Lump Sum Payments

Upon the receipt of a sum that has been identified by an Officer’s Certificate as a Lump Sum Payment, the Indenture Trustee shall transfer all proceeds of such Lump Sum Payment to the Lump Sum Redemption Account to pay, on the next Distribution Date following such receipt, in the following order: (i) past due interest on the Senior Bonds, Pro Rata, (ii) accrued and unpaid interest on the Senior Bonds, Pro Rata, (iii) principal of the Senior Bonds without premium, in chronological order of the date on which such principal is due and Pro Rata in respect of the amount of principal due on each such principal due date, (iv) past due interest on the Subordinate Bonds, Pro Rata, (v) accrued and unpaid interest on the Subordinate Bonds, Pro Rata and (vi) principal or Accreted Value of the Subordinate Bonds without premium, in chronological order of the date on which such principal or Accreted Value is due and Pro Rata in respect of the amount of principal or Accreted value due on each such principal due date.

Prepayment from Total Lump Sum Payments

Upon the receipt of a sum that has been identified by an Officer’s Certificate as a Total Lump Sum Payment, the Indenture Trustee shall transfer all proceeds of such Total Lump Sum Payment to the Lump Sum Redemption Account to pay, in the following order: (i) past due interest on the Senior Bonds, Pro Rata, (ii) accrued and unpaid interest on the Senior Bonds, Pro Rata, (iii) principal of the Senior Bonds without premium, in chronological order of the date on which such principal is due and Pro Rata within such a principal due date or Maturity Date, (iv) past due interest on the Subordinate Bonds, Pro Rata, (v) accrued and unpaid interest on the Subordinate Bonds, Pro Rata and (vi) principal or Accreted Value of the Subordinate Bonds without premium, Pro Rata, irrespective of the principal payment date or Maturity Date on which any such principal or Accreted Value was due.

Other Applications

Funds in the Operating Account shall be applied by the Indenture Trustee at any time, in accordance with directions in an Officer’s Certificate pursuant to the Indenture, to pay Operating Expenses or to fund an account of the Agency which will also be free and clear of the lien of the Indenture for purposes of paying such Operating Expenses; provided, however, that the Indenture Trustee may always first reserve in the Operating Account amounts sufficient to pay the Indenture Trustee’s fees and expenses pursuant to the Indenture for the next twelve months.

Funds in the Operating Contingency Account shall be applied by the Indenture Trustee at any time, in accordance with directions in an Officer’s Certificate pursuant to the Indenture, to pay Operating Expenses not otherwise paid from the Operating Account, or to fund an account of the Agency which will also be free and clear of the lien of the Indenture for purposes of paying such Operating Expenses.

Events of Default; Remedies

Events of Default Under the Indenture

An “Event of Default” under the Indenture means any one of the following events:

(a) a Senior Payment Default;

(b) a Subordinate Payment Default;

(c) failure of the Agency to observe or perform any covenant, condition, agreement, or provision contained in the Bonds or in the Indenture (other than a failure under the preceding clause (a) or (b) and other than the Agency’s covenant to comply with the Continuing Disclosure Undertaking), which breach is not remedied within 60 days after Written Notice, specifying such default and requiring the same to be remedied, shall have been given to the Agency by the Indenture Trustee or by the Owners of at least 25% in principal amount or Accreted Value of the Bonds then Outstanding; provided, however, if the default be such that it cannot be

198 corrected within the said 60-day period, it shall not constitute an Event of Default if corrective action is instituted by the Agency within said 60-day period and diligently pursued until the default is corrected; and

(d) an event of default has occurred and is continuing under the Loan Agreement.

Notwithstanding the foregoing, a Subordinate Payment Default (i) shall not cause any Senior Bonds to be deemed to be in default if the payment of all interest and principal then due on such Senior Bonds has been timely paid, and (ii) until no Senior Bonds shall remain Outstanding, shall not give rise to any of the remedies described in “— Remedies Available to the Indenture Trustee” below being available to cure any such nonpayment of Subordinate Bonds.

Remedies Available to the Indenture Trustee

If an Event of Default occurs, the Indenture Trustee may, and upon written request of the Owners of at least 25% in principal amount or Accreted Value of the Bonds Outstanding shall, in its own name by action or proceeding in accordance with law: (A) enforce all rights of the Owners and require the Agency, the Corporation or the County to carry out their respective agreements under the Bonds, the Indenture, the Loan Agreement or the Sale Agreement; (B) sue upon such Bonds; (C) require the Agency to account as if it were the trustee of an express trust for such Owners; and (D) enjoin any acts or things which may be unlawful or in violation of the rights of such Owners. The Indenture Trustee shall, in addition to the other provisions described in this subheading, have and possess all of the powers necessary or appropriate for the exercise of any functions incident to the general representation of Owners in the enforcement and protection of their rights.

Upon a Senior Payment Default or a Subordinate Payment Default, or a failure to make any other payment required under the Indenture within 7 days after the same becomes due and payable, the Indenture Trustee shall give Written Notice thereof to the Agency. The Indenture Trustee shall give notice under clause (c) of the definition of Event of Default when instructed to do so by the written direction of another Fiduciary or the Owners of at least 25% in principal amount or Accreted Value of the Outstanding Bonds. Upon the occurrence of an Event of Default, the Indenture Trustee shall proceed as provided under the Indenture for the benefit of the Owners in accordance with the written direction of a Majority in Interest of the Outstanding Bonds. The Indenture Trustee shall not be required to take any remedial action (other than the giving of notice) unless reasonable indemnity is furnished for any expense or liability to be incurred therein. Upon receipt of Written Notice, direction, and indemnity, and after making such investigation, if any, as it deems appropriate to verify the occurrence of any Event of Default of which it is notified as aforesaid, the Indenture Trustee shall promptly pursue the remedies provided by the Indenture or any such remedies (not contrary to any such direction) as it deems appropriate for the protection of the Owners, and shall act for the protection of the Owners with the same promptness and prudence as would be expected of a prudent person in the conduct of such person’s own affairs.

If the Indenture Trustee determines that any default or Event of Default has been cured before the entry of any final judgment or decree with respect to it, the Indenture Trustee may waive such default or Event of Default and its consequences, by Written Notice to the Agency, and shall do so upon written instruction of the Owners of at least 25% in principal amount or Accreted Value of the Outstanding Bonds.

The rights and remedies under the Indenture shall be cumulative and shall not exclude any other rights and remedies allowed by law, provided there is no duplication of recovery. The failure to insist upon a strict performance of any of the obligations of the Agency or to exercise any remedy for any violation thereof shall not be taken as a waiver for the future of the right to insist upon strict performance by the Agency or of the right to exercise any remedy for the violation.

No delay or omission of the Indenture Trustee or of any Owner to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by the Indenture or by law to the Indenture Trustee or to the Owners may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee or by the Owners, as the case may be.

199 Additional Bonds

“Additional Bonds” are Bonds (including Refunding Bonds), other than the Series 2020 Bonds and any Junior Bonds, issued pursuant to the Indenture.

Refunding Bonds may be issued to refund all Bonds in whole (including the funding of defeasance escrows and deposits to Accounts in connection with such issuance).

Additional Bonds may also be issued for any other lawful purpose at the discretion of the Agency, including Refunding Bonds issued to refund Bonds in part (including the funding of defeasance escrows and deposits to Accounts in connection with such issuance), but only if upon the issuance of such Additional Bonds: (A) no Event of Default shall have occurred and is continuing with respect to (x) if such Additional Bonds proposed to be issued are Senior Bonds, the Senior Bonds then Outstanding or (y) if such Additional Bonds proposed to be issued are Subordinate Bonds, the Subordinate Bonds then Outstanding; (B) the expected weighted average life of each Turbo Term Bond that will remain Outstanding after the date of issuance of the Additional Bonds as computed by the Agency on the basis of new projections on the date of issuance of the Additional Bonds will not exceed (x) the remaining expected weighted average life of each such Turbo Term Bond as computed by the Agency on the basis of such new projections on the date of issuance of the Additional Bonds assuming that no such Additional Bonds are issued plus (y) one year; and (C) a Rating Confirmation is received for any Bonds which are then rated by a Rating Agency that will remain Outstanding after the date of issuance of the Additional Bonds.

Additional Bonds, including Refunding Bonds, may only be issued with the prior written consent of the Residual Trust.

Junior Bonds

One or more Series of Bonds (the “Junior Bonds”) may be issued for any lawful purpose if there is no payment permitted for such Bonds until all previously issued Senior Bonds and Subordinate Bonds are Fully Paid (as defined herein). Junior Bonds may be issued without satisfying the requirements of the Indenture for Additional Bonds. Junior Bonds may only be issued with the prior written consent of the Residual Trust.

Non-Impairment Covenants

In accordance with the Indenture, the Agency shall from time to time authorize, execute or authenticate, deliver and file all financing statements, continuation statements, amendments to financing statements, documents and instruments, and will take such other action, as is necessary or advisable to maintain or preserve the lien and security interest (and the perfection and priority thereof) of the Indenture; to perfect or protect the validity of any grant made or to be made by the Indenture; to preserve and defend title to the Collateral and the rights of the Indenture Trustee in the Collateral against the claims of all Persons and parties, including the challenge by any party to the validity or enforceability of the MSA, the MOU, the ARIMOU, or the Basic Documents; to enforce the Loan Agreement and the Sale Agreement; to pay any and all taxes levied or assessed upon all or any part of the Collateral; or to carry out more effectively the purposes of the Indenture.

In accordance with the Indenture, the Agency shall diligently pursue any and all actions to enforce its rights in the Collateral and under each instrument or agreement included therein, and shall not take any action and will use its best efforts not to permit any action to be taken by others that would release any Person from any of such Person’s covenants or obligations under any such instrument or agreement or that would result in the amendment, hypothecation, subordination, termination, or discharge of, or impair the validity or effectiveness of, any such instrument or agreement, except, in each case, as expressly provided in the Basic Documents, the MOU or the ARIMOU.

In accordance with the Sale Agreement, the County shall not take any actions or omit to take any actions which adversely affect the interests of the Corporation in the County Tobacco Assets and in the proceeds thereof; and the County shall not take any action or omit to take any action that shall adversely affect the ability of the Corporation, and any assignee of the Corporation, to receive payments made under the MOU, the ARIMOU, the MSA and the

200 Consent Decree; provided, however, that nothing in the Sale Agreement shall be deemed to prohibit the County from undertaking any activities (including educational programs, regulatory actions, or any other activities) intended to reduce or eliminate smoking or the consumption or use of tobacco or tobacco related products.

In accordance with the Sale Agreement, the County shall not take any action or omit to take any action and shall use its reasonable efforts not to permit any action to be taken by others that would release any Person from any of such Person’s covenants or obligations under the MSA, the MOU or the ARIMOU, or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, the MSA, the MOU or the ARIMOU, nor, without the prior written consent of the Corporation or its assignee, amend, modify, terminate, waive or surrender, or agree to any amendment, modification, termination, waiver or surrender of, the terms of the MSA, the MOU or the ARIMOU, or waive timely performance or observance under such documents, in each case if the effect thereof would be materially adverse to the Bondholders.

In accordance with the Loan Agreement, the Corporation shall take all actions as may be required by law to fully preserve, maintain, defend, protect and confirm the interests of the Agency and the interests of the Indenture Trustee in the Corporation Tobacco Assets. The Corporation shall not take any action that shall adversely affect the Agency’s or the Indenture Trustee’s ability to receive payments made under the MOU, the ARIMOU, the MSA and the Consent Decree.

In accordance with the Loan Agreement, the Corporation shall not limit or alter the rights of the Agency to fulfill the terms of its agreements with the Holders of the Bonds, or in any way impair the rights and remedies of such Holders or the security for the Bonds and shall enforce all of its rights under the Sale Agreement, until the Bonds, together with the interest thereon and all costs and expenses in connection with any action or proceeding by or on behalf of such Holders, are fully paid and discharged.

In accordance with the Loan Agreement, the Corporation shall not take any action and shall use its best efforts not to permit any action to be taken by others that would release any Person from any of such Person’s covenants or obligations under the MOU or the ARIMOU or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, the MOU or the ARIMOU, nor, without the prior written consent of the Agency and the Indenture Trustee, amend, modify, terminate, waive or surrender, or agree to any amendment, modification, termination, waiver or surrender of, the terms of the MOU or the ARIMOU, or waive timely performance or observance under such documents, in each case if the effect thereof would be materially adverse to the Bondholders.

THE SERIES 2020 BONDS

The following summary describes certain terms of the Series 2020 Bonds. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the provisions of the Indenture and the Series 2020 Bonds. Terms used herein and not previously defined have the meanings given to them in the Indenture, the form of which is attached hereto as APPENDIX F-1 – “FORM OF INDENTURE AND SERIES 2020 SUPPLEMENT”. Copies of the Indenture, the Loan Agreement and the Sale Agreement may be obtained upon written request to the Indenture Trustee.

General

The Series 2020 Bonds will be dated their date of delivery, will be issued in the initial principal amounts, and will accrue or accrete interest, as applicable, at the rates and mature on the dates set forth on the inside cover of this Offering Circular. The Series 2020A Senior Bonds are Senior Bonds under the Indenture and the Series 2020B Subordinate Bonds are Subordinate Bonds under the Indenture. The Series 2020A Senior Bonds will be senior to the Series 2020B Subordinate Bonds in payment priority under the Indenture as described in “SECURITY FOR THE BONDS—Flow of Funds” herein. The Series 2020B Subordinate Bonds are Turbo Term Bonds. The Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds are Current Interest Bonds, and the Series 2020B-2 Subordinate Bonds are Capital Appreciation Bonds.

201 The Series 2020 Bonds will initially be represented by one Series 2020 Bond for each maturity of a Series of the Series 2020 Bonds, registered in the name of DTC, New York, New York, or its nominee. DTC will act as securities depository for the Series 2020 Bonds. Beneficial Owners of the Series 2020 Bonds will not receive physical delivery of the Series 2020 Bonds. See APPENDIX G – “BOOK-ENTRY ONLY SYSTEM” attached hereto. The Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds will be sold in denominations of $5,000 or any integral multiple thereof, and the Series 2020B-2 Subordinate Bonds will be sold such that the Accreted Value thereof at the Maturity Date is in the denomination of $250,000 or any integral multiple of $5,000 in excess thereof (each, as applicable, an “Authorized Denomination”). “Maturity Date” means, with respect to any Bond, the final date on which all remaining principal or Accreted Value of such Bond is due and payable.

“Current Interest Bond” means a Bond the interest on which is payable currently on each Distribution Date. “Capital Appreciation Bond” means a Bond the interest on which is compounded on each Distribution Date, commencing on the first Distribution Date after its issuance through and including the Maturity Date or earlier redemption date of such Bond.

Payments on the Series 2020 Bonds

Interest

Interest on the Series 2020 Bonds will be calculated on the basis of a year of 360 days and twelve, 30-day months. Interest on the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds will accrue from their dated date and shall be payable currently on each Distribution Date, commencing [*June 1, 2021*], through and including their respective Maturity Dates or earlier redemption dates of such Bonds. Interest on the Series 2020B Subordinate Bonds will not be paid currently but will accrete in value, compounded semiannually on each Distribution Date, commencing [*June 1, 2021*] (to become part of Accreted Value), from the initial principal amount on the date of delivery thereof to maturity or earlier redemption, at the Accretion Rate thereof, specified in APPENDIX I — “TABLE OF ACCRETED VALUES OF SERIES 2020 SUBORDINATE BONDS.” “Accretion Rate” means, with respect to any particular Capital Appreciation Bond, the interest rate which when accreted and compounded on each Distribution Date from its issuance date, causes the initial principal amount to equal the Accreted Value on the Maturity Date or on the Conversion Date, as applicable, of such Capital Appreciation Bond, as set forth in the related Series Supplement or in an exhibit thereto.

For each Distribution Date, payments will be made to the registered owners of the Series 2020 Bonds (the “Owners”) as of the 15th day of the calendar month immediately preceding the calendar month in which a Distribution Date occurs (the “Record Date”). The Agency or the Indenture Trustee may in its discretion establish special record dates for the determination of the Owners for various purposes of the Indenture, including giving consent or direction to the Indenture Trustee.

In the event a Series 2020A Senior Bond or a Series 2020B-1 Subordinate Bond remains Outstanding after its Maturity Date, such Bond will continue to accrue and pay interest at its stated interest rate, and in the event that a Series 2020B Subordinate Bond remains Outstanding after its Maturity Date, such Bond will accrue and pay interest at its Default Rate from its Maturity Date. “Default Rate” means the rate of interest per annum set forth in a Series Supplement at which Capital Appreciation Bonds will accrete on and during the continuance of a Subordinate Payment Default for such Bonds. The Default Rate with respect to the Series 2020B-2 Subordinate Bonds is ____% interest per annum.

Principal or Accreted Value

The principal or Accreted Value of the Series 2020 Bonds shall be paid by their respective Maturity Dates as set forth on the inside front cover of this Offering Circular and, with respect to the Series 2020A Senior Bonds that are Term Bonds, on their Sinking Fund Installment dates as described herein. “Accreted Value” with respect to any Capital Appreciation Bond is, as more fully set forth in APPENDIX F-1 – “FORM OF INDENTURE AND SERIES 2020 SUPPLEMENT”, an amount equal to the initial principal amount of such Bond, plus interest accrued thereon from its date, compounded on each Distribution Date, commencing on the first Distribution Date after its issuance (through and including the Maturity Date or earlier redemption date of such Bond) at the Accretion Rate for such Bond. See APPENDIX I – “TABLE OF ACCRETED VALUES OF SERIES 2020B SUBORDINATE BONDS.”

202 Mandatory Redemption of Series 2020A Senior Term Bonds by Sinking Fund Installments

The Series 2020A Senior Bonds maturing on June 1, 20__* are Term Bonds that are subject to mandatory redemption in part on June 1 of the years and in the principal amounts equal to the respective Sinking Fund Installments as set forth in the table below. “Sinking Fund Installments” are each of the respective mandatory principal payments to be made on Term Bonds scheduled to be made from Collections pursuant to the Indenture. Failure to pay Sinking Fund Installments on the Series 2020A Senior Bonds is an Event of Default under the Indenture. See “SECURITY FOR THE BONDS — Events of Default; Remedies.”

Series 2020A Senior Bonds due June 1, 20__*

June 1* Sinking Fund Installment* June 1* Sinking Fund Installment* $ $

†

______† Stated Maturity

Turbo Redemption of Series 2020B Subordinate Bonds

The Indenture requires that Turbo Available Collections, if any, as described in “SECURITY FOR THE BONDS—Flow of Funds,” be applied from the Turbo Redemption Account to the redemption of the Series 2020B Subordinate Bonds on each Distribution Date, in whole or in part, at the principal amount or Accreted Value thereof being redeemed, without premium, following notice of such redemption in accordance with the Indenture (each such redemption, a “Turbo Redemption”). Moneys available for each such Turbo Redemption will be applied to redeem the Series 2020B Subordinate Bonds in chronological order of scheduled maturity. Turbo Redemptions are not scheduled amortization payments, and are required to be made only from Turbo Available Collections, if any. The ratings on the Series 2020B-1 Subordinate Bonds do not address the payment of Turbo Redemptions on such Bonds. The Series 2020B-2 Subordinate Bonds are not rated. Amounts in the Subordinate Liquidity Reserve Account are not available to make Turbo Redemptions. Failure to make Turbo Redemptions will not constitute a Subordinate Payment Default or any other Event of Default under the Indenture to the extent that such failure results from the insufficiency of Turbo Available Collections.

For a schedule of projected Turbo Redemptions, see the table entitled “Projected Series 2020 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds” in “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” herein (“Projected Turbo Redemptions”).

Optional Redemption

The Series 2020B-1 Subordinate Bonds and the Series 2020B-2 Subordinate Bonds are each subject to redemption (from any source other than moneys in the Pledged Accounts) at the option of the Agency at the direction of the Corporation, (x) in the case of the Series 2020B-1 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the principal amount being redeemed, plus interest accrued to the redemption date, and (y) in the case of the Series 2020B-2 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the Accreted Value being redeemed on the redemption date, in each case in whole or in part from any maturity selected by the Agency at the direction of the Corporation in its discretion, in applicable Authorized Denominations, at any time, but only in an amount that may not exceed the cumulative amount of the Projected Turbo Redemptions that were projected to be paid but, as of the date of such redemption, have not been paid with respect to such Series 2020B-1 Subordinate Bonds or Series 2020B-2 Subordinate Bonds, as applicable. See the table entitled “Projected Series 2020

* Preliminary, subject to change.

203 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds” in “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” herein.

In addition, the Series 2020A Senior Bonds, the Series 2020B-1 Subordinate Bonds and the Series 2020B-2 Subordinate Bonds are each subject to redemption (from any source other than moneys in the Pledged Accounts) at the option of the Agency at the direction of the Corporation, (x) in the case of the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the principal amount being redeemed, plus interest accrued to the redemption date, and (y) in the case of the Series 2020B Subordinate Bonds, at a redemption price equal to one hundred percent (100%) of the Accreted Value being redeemed on the redemption date, in each case in whole or in part, in applicable Authorized Denominations, on any date on or after June 1, 20__*, from any maturity selected by the Agency at the direction of the Corporation in its discretion, and within a maturity on such basis as the Indenture Trustee shall deem fair and appropriate, including by lot; provided, however, that, with respect to Series 2020A Senior Bonds that are Term Bonds, the Agency at the direction of the Corporation may, in its discretion, select the Sinking Fund Installments called for redemption.

Application of Funds Following a Senior Payment Default

Beginning on the Distribution Date immediately following the occurrence of any Senior Payment Default and continuing on each succeeding Distribution Date until such Senior Payment Default is cured, Collections shall be applied as described herein under “SECURITY FOR THE BONDS—Flow of Funds—Payment Defaults.”

Extraordinary Payment of Series 2020B Subordinate Bonds Following a Subordinate Payment Default

Beginning on the Distribution Date immediately following the occurrence of any Subordinate Payment Default and continuing on each succeeding Distribution Date thereafter, the Indenture Trustee shall apply all funds in the Subordinate Extraordinary Payment Account, the Subordinate Debt Service Account (if any), the Turbo Redemption Account (if any) and the Subordinate Liquidity Reserve Account (if any), in that order, to make Extraordinary Payments as described in “SECURITY FOR THE BONDS—Flow of Funds—Payment Defaults.”

Mandatory Redemption from Lump Sum Payments and Total Lump Sum Payments

The Series 2020 Bonds shall be redeemed in whole or in part prior to their stated maturity, following notice of such redemption in accordance with the Indenture, at a redemption price equal to 100% of the principal amount or Accreted Value thereof being redeemed, without premium, (i) on any Distribution Date from Lump Sum Payments on deposit in the Lump Sum Redemption Account and (ii) on the earliest practicable Business Day from Total Lump Sum Payments on deposit in the Lump Sum Redemption Account. See “SECURITY FOR THE BONDS — Flow of Funds — Prepayment from Lump Sum Payments” and “— Prepayment from Total Lump Sum Payments”, as applicable.

Clean-Up Call Redemption

Optional Clean-Up Call of Senior Bonds. The Senior Bonds are subject to optional redemption in whole, on any Distribution Date, at a redemption price equal to one hundred percent (100%) of the principal amount being redeemed plus interest accrued to the redemption date, without premium, when the available amounts on deposit in the Pledged Accounts allocable to the Senior Bonds exceed the aggregate principal amount of, and accrued interest on, all Outstanding Senior Bonds.

Mandatory Clean-Up Call of Subordinate Bonds. The Subordinate Bonds are subject to mandatory redemption in whole, on any Distribution Date, at a redemption price equal to one hundred percent (100%) of the principal amount or Accreted Value being redeemed plus interest accrued to the redemption date, without premium, when the available amounts on deposit in the Pledged Accounts allocable to the Subordinate Bonds exceed the aggregate principal amount or Accreted Value of, and accrued interest on, all Outstanding Subordinate Bonds.

* Preliminary, subject to change.

204 Notice of Redemption

When a Series 2020 Bond is to be redeemed prior to its stated Maturity Date, the Indenture Trustee shall give notice to the Owner thereof (and to the Rating Agency as required by the Indenture) in the name of the Agency, which notice shall identify the Series 2020 Bond to be redeemed, state the date fixed for redemption, and state that such Series 2020 Bond will be redeemed at the Corporate Trust Office of the Indenture Trustee or a Paying Agent. The notice shall further state that on such date there shall become due and payable upon each Series 2020 Bond to be redeemed the redemption price thereof, together with interest accrued or accreted to the redemption date, and that from and after such date, sufficient money therefor having been deposited with the Indenture Trustee or Paying Agent, interest thereon shall cease to accrue or accrete. The Indenture Trustee shall give at least 20 days’ prior notice (or such shorter period if then permitted by the Depository) by mail, or otherwise transmit the redemption notice in accordance with any appropriate provisions of the Indenture, to the registered owners of any Series 2020 Bonds which are to be redeemed, at their addresses shown on the registration books of the Agency. Such notice may be waived by any Owners holding Series 2020 Bonds to be redeemed. Failure by a particular Owner to receive notice, or any defect in the notice to such Owner, shall not affect the redemption of any other Series 2020 Bond. Any notice of redemption given pursuant to the Indenture may be rescinded by Written Notice to the Indenture Trustee by the Agency no later than 5 days prior to the date specified for redemption. The Indenture Trustee shall give notice of such rescission as soon thereafter as practicable in the same manner and to the same persons, as notice of such redemption was given as described above. In making the determination as to how much money will be available in the Turbo Redemption Account on any Distribution Date for the purpose of giving notice of redemption, the Indenture Trustee shall take into account investment earnings that it reasonably expects to be available for application as described in “SECURITY FOR THE BONDS—Flow of Funds.”

The Agency at the direction of the Corporation may instruct the Indenture Trustee to provide conditional notice of any optional redemption, which may be conditioned upon the receipt of moneys or any other event. In the event that notice of optional redemption contains any condition or conditions and such condition or conditions shall not have been satisfied on or prior to the date fixed for redemption, the redemption shall not be made and the Indenture Trustee shall within a reasonable time thereafter give notice to the Persons to the effect that such condition or conditions were not met and such redemption was not made, such notice to be given by the Indenture Trustee in the same manner and to the same parties, as notice of such redemption was given. Such failure to redeem Bonds shall not constitute an Event of Default under the Indenture or an Event of Default under the Loan Agreement.

Selection of Series 2020 Bonds for Redemption

If less than all of the Series 2020 Bonds of a maturity or Sinking Fund Installment, as applicable, are to be redeemed by Sinking Fund Installments, Turbo Redemption or optional redemption, the Owners of the Series 2020 Bonds within such maturity or Sinking Fund Installment shall be paid on such basis as the Indenture Trustee shall deem fair and appropriate, including by lot, and the Indenture Trustee may provide for the selection for redemption of portions (equal to any Authorized Denominations) of the principal or Accreted Value of Series 2020 Bonds of a denomination larger than the minimum Authorized Denomination; provided, however, that a Series Supplement may provide for the Agency at the direction of the Corporation to specify the maturities of a series of Bonds to be redeemed or the Sinking Fund Installments within a maturity to be redeemed. Turbo Redemptions of the Series 2020B Subordinate Bonds shall be credited against the amount Outstanding at the Accreted Value thereof. Upon surrender of the Series 2020B Subordinate Bonds redeemed in part only, the Agency shall execute and the Indenture Trustee shall authenticate and deliver to the Owner thereof, at the expense of the Agency, a new Series 2020B Subordinate Bond of Authorized Denominations equal to the Accreted Value Outstanding on the date set for redemption after deducting the Accreted Value to be redeemed on such date. In determining these amounts, the Indenture Trustee may compute: (x) the Accreted Value outstanding per Authorized Denomination on the date set for redemption; (y) the number of Authorized Denominations to be redeemed on the date set for redemption at the Accreted Value thereof from the amounts available for such redemption; and (z) the number of Authorized Denominations to remain Outstanding after the redemption.

205 Effect of Redemptions on Sinking Fund Installments and Turbo Term Bond Maturities

For all purposes of the Indenture, including without limitation calculating deposits and payments described in “SECURITY FOR THE BONDS—Flow of Funds” and determining whether an Event of Default has occurred, all redemptions made under the Indenture from Collections shall be credited as follows:

(i) the amount of any Turbo Redemptions shall be credited against Turbo Term Bond Maturities for the Turbo Term Bonds in the order of priority and within a priority in the chronological order set forth in the applicable Series Supplement (“Turbo Term Bond Maturity” means the payment of principal required to be made upon the final maturity of any Turbo Term Bond, as set forth in a Series Supplement);

(ii) the amount of any Sinking Fund Installments made under the Indenture shall be credited against Term Bond Maturities for the Term Bonds in the order of priority and within a priority in the chronological order set forth in the applicable Series Supplement; provided, however, that Sinking Fund Installments scheduled for the same date shall be credited Pro Rata regardless of the Maturity Date of the related Term Bond Maturity (“Term Bond Maturity” means the payment of principal required to be made upon the final maturity of any Term Bond, as set forth in a Series Supplement); and

(iii) the amount of any optional redemption of Term Bonds in part shall be credited against any Sinking Fund Installment as directed by the Agency.

Limitation on Open Market Purchases

Pursuant to the Indenture, moneys in any Pledged Account shall not be used to make open market purchases of Turbo Term Bonds (including the Series 2020B Subordinate Bonds). Moneys in the Surplus Account may be used to make open market purchases of Senior Bonds (including the Series 2020A Senior Bonds). Any Senior Bonds so purchased shall be delivered to the Indenture Trustee for cancellation.

THE AGENCY

The Agency is a public entity created by a Joint Exercise of Powers Agreement (the “Joint Powers Agreement”), dated as of November 15, 2000, as amended, by and among the County and the counties of Merced, Kern, Stanislaus, Marin, Los Angeles, Fresno, Alameda and Sonoma, California, pursuant to Article 1 of Chapter 5 of Division 7 of Title 1 of the California Government Code (Section 6500 and following) (the “Act,” which includes the Marks-Roos Local Bond Pooling Act of 1985). The Agency was created, in part, to insure, hedge or otherwise manage the risk associated with the receipt of MSA payments of one or more Members by issuing bonds secured by such payments, the proceeds of which bonds would be used directly or indirectly to purchase all or a portion of such payments from a Member or Members, and to provide for the exercise of additional powers given to a joint powers entity under the Act, including, but not limited to, the Marks-Roos Local Bond Pooling Act of 1985.

The Agency is a separate entity from its Members (including the County), and its debts, liabilities and obligations do not constitute debts, liabilities or obligations of the Members.

Norton Rose Fulbright US LLP acts as general counsel to the Agency.

Commission

The Agency is administered by a Commission (the “Commission”), whose members (each a “Commissioner”) are at all times appointees of the Board of Supervisors of each Member (who may include members of the appointing Board of Supervisors). The Board of Supervisors of each Member has designated two Commissioners to the Commission. The County and the other counties listed above are the only Members of the Agency.

The Commission will take no action except upon the affirmative vote of the majority of the Commissioners present, which majority, except as otherwise provided in the Joint Powers Agreement, must include at least one

206 Commissioner representing each Member. For the purpose of taking any action relating to the issuance and sale of bonds secured by the MSA payments of a single Member (the “Affected Member”), the Commission will consist of the Commissioners designated by the Board of Supervisors of the Affected Member and one additional Commissioner designated by resolution of the Commission or, in the absence of such resolution, as designated by the President of the Agency.

Officers

The officers of the Agency are the President, Vice-President, and Secretary. The President and Vice-President are elected from among the Agency Members while the Secretary of the Agency is appointed by the Members and need not be a commissioner of the Commission. The term of office shall be the Fiscal Year of the Members, or until a successor is elected.

THE CORPORATION

The Corporation is organized under California law as a nonprofit, public benefit corporation. The Corporation is governed by a three-person board of directors consisting of two directors who are employees of the County and one independent director who is not, and has not been for a period of five years prior to his or her appointment as independent director, (i) a customer, supplier or advisor of the County; (ii) an official, member, stockholder, director, officer, employee, agent or affiliate of the County (other than the Corporation); (iii) a person related to any person referred to in clause (i) or (ii); or (iv) a trustee, conservator or receiver for the County. The Corporation has no assets other than the County Tobacco Assets. The Corporation was organized for the sole purpose of purchasing the County Tobacco Assets.

PLAN OF FINANCE

The Agency will use the proceeds from the issuance of the Series 2020 Bonds, together with other available funds, to (i) refund on a current basis all of the Series 2006 Bonds through defeasance and redemption, (ii) fund deposits to the Liquidity Reserve Accounts and Debt Service Accounts held under the Indenture, (iii) fund a payment to the registered owner of the Residual Certificate for certain capital improvements of the County and (iv) pay costs of issuance in connection with the issuance of the Series 2020 Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” and “VERIFICATION OF MATHEMATICAL COMPUTATIONS.”

On the date of delivery of the Series 2020 Bonds, the Agency will enter into an Escrow Agreement, dated as of _____ 1, 2020 (the “Escrow Agreement”), by and between the Agency and the Indenture Trustee, as escrow agent, to provide for the refunding of the Series 2006 Bonds. The Escrow Agreement will create an irrevocable trust fund, which is to be held by the Indenture Trustee, the moneys to the credit of which will be applied to the payment of, and pledged solely for the benefit of, the Series 2006 Bonds. The Agency will deposit a portion of the proceeds from the sale of the Series 2020 Bonds, together with other available funds, into the trust fund in amounts that will be retained as cash or invested, at the direction of the Agency, in Defeasance Collateral, as defined in the Indenture for the Series 2006 Bonds, that matures or is subject to redemption at the option of the holder in amounts and bearing interest at rates sufficient without reinvestment (i) to redeem the Series 2006 Bonds on their redemption date at their redemption price and (ii) to pay the interest on the Series 2006 Bonds to the redemption date. The Series 2006 Bonds are expected to be redeemed on or about ______, 2020.

Upon issuance of the Series 2020 Bonds, the Series 2006 Bonds will be irrevocably designated for redemption as described above, provision will be made in the Escrow Agreement for the giving of notice of such redemption, and the Series 2006 Bonds shall not be redeemed other than as described above.

By virtue of the provision for payment of the Series 2006 Bonds upon redemption, together with the irrevocable deposit and application of monies and securities in the trust fund and certain other provisions of the Escrow Agreement, the Series 2006 Bonds will be deemed to be no longer outstanding under the Indenture and, except for purposes of any payment from such moneys and securities, shall no longer be secured by or entitled to the benefits of the Indenture.

207 ESTIMATED SOURCES AND USES OF FUNDS

The estimated sources and uses of funds are expected to be as follows:

Sources of Funds: Initial Principal Amount of the Series 2020 Bonds $ Net Original Issue Premium Funds Held Under the Indenture for the Series 2006 Bonds Total Sources $

Uses of Funds: Defeasance of Series 2006 Bonds $ Payment to Registered Owner of the Residual Certificate Deposit to Senior Liquidity Reserve Account Deposit to Subordinate Liquidity Reserve Account Deposit to Senior Debt Service Account Deposit to Subordinate Debt Service Account Costs of Issuance (1) Total Uses $ ______(1) Includes underwriter’s discount, legal fees, rating agency fees, fees of IHS Global, verification agent fees, printing costs and certain other expenses related to the issuance of the Series 2020 Bonds.

TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE

The following tables set forth the projected debt service coverage for the Series 2020A Senior Bonds and projected debt service requirements for the Series 2020 Bonds based on the application of the Tobacco Settlement Revenues Projection Methodology and Assumptions and the Bond Structuring Methodology and Assumptions described herein under “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS”.

No assurance can be given that actual cigarette consumption in the U.S. will be as assumed, that actual County population during the term of the Series 2020 Bonds will be as assumed, or that the other assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions, including the market shares of the OPMs and the SPMs and the assumption that there will not be an NPM Adjustment, will be consistent with future events. If actual events deviate from one or more of the assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions and the Bond Structuring Methodology and Assumptions, the amount of funds available to the Agency to pay the principal or Accreted Value of and interest on the Series 2020 Bonds and to make Turbo Redemptions on the Series 2020B Subordinate Bonds could be adversely affected. See “RISK FACTORS” herein.

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208 Series 2020A Senior Bonds Debt Service and Projected Debt Service Coverage*

[TABLE TO COME] ______* Preliminary, subject to change. (1) Based on application of the Tobacco Settlement Revenues Projection Methodology and Assumptions described in “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein. (2) Excludes application of the Optional Clean-Up Call. (3) Series 2020 Bonds Debt Service Coverage equals Net Revenues Available for Debt Service divided by Series 2020A Bonds Net Debt Service.

209 Projected Series 2020 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds*

[TABLE TO COME]

______* Preliminary, subject to change. (1) Based on application of the Tobacco Settlement Revenues Projection Methodology and Assumptions described in “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein. (2) Includes application of the Optional Clean-Up Call. (3) Reflects Turbo Redemption of Series 2020B Subordinate Bonds at their then Accreted Value. (4) Includes all Interest, Series 2020A Senior Bonds principal and mandatory Sinking Fund Installments, Series 2020B Subordinate Bonds projected Turbo Redemptions, less assumed earnings and releases on the Liquidity Reserve Accounts.

210 SERIES 2020B SUBORDINATE BONDS PROJECTED TURBO REDEMPTION UNDER VARIOUS CONSUMPTION DECLINE SCENARIOS

Series 2020B Subordinate Bonds Projected Final Turbo Redemption Payment Dates Under Various Consumption Decline Scenarios

The following tables set forth the expected final redemption dates at which the Series 2020B Subordinate Bonds would be paid in full based on the following cigarette consumption decline projections:

• [*IHS Global forecast;

• –____%* constant annual decline beginning in 2020;

• –____%† constant annual decline beginning in 2020; and

• –____%‡ constant annual decline beginning in 2020 (for the Series 2020B Subordinate Bonds only).

The [*–____%**] constant annual decline[s] represent[s] the “breakeven” consumption decline rate[s] at which debt service on the Series 2020B Subordinate Bonds maturing in 20__*, [20__* and 20__*, respectively,] would be paid in full at legal final maturity. The tables below further assume the Series 2020B Subordinate Bonds bear or accrete interest at the rate[s] described on the inside cover page hereof and the Tobacco Settlement Revenues are received in accordance with the Tobacco Settlement Revenues Projection Methodology and Assumptions and the Bond Structuring Methodology and Assumptions described herein under “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” and applied as set forth in the Indenture, including the application of amounts in the Turbo Redemption Account. See “SECURITY FOR THE BONDS” herein.

No assurance can be given that actual cigarette consumption in the U.S. will be as assumed, that actual County population during the term of the Series 2020 Bonds will be as assumed, or that the other assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions, including the market shares of the OPMs and the SPMs and the assumption that there will not be an NPM Adjustment, will be consistent with future events. If actual events deviate from one or more of the assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions and the Bond Structuring Methodology and Assumptions, the amount of funds available to the Agency to pay the principal or Accreted Value of and interest on the Series 2020 Bonds and to make Turbo Redemptions on the Series 2020B Subordinate Bonds could be adversely affected. See “RISK FACTORS” herein.

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* Preliminary, subject to change.

† Preliminary, subject to change.

‡ Preliminary, subject to change.

211 Projected Principal Repayment Dates for Series 2020B Subordinate Bonds Under Various Consumption Decline Scenarios*

[TABLE TO COME]

______* Preliminary, subject to change. (1) Based on application of the Tobacco Settlement Revenues Projection Methodology and Assumptions described under “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein. (2) Based on application of the Tobacco Settlement Revenues Projection Methodology and Assumptions described under “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein with the exception of the Volume Adjustment, which utilizes the above listed annual declines in cigarette consumption in the U.S. beginning in 2020.

212 BREAKEVEN CONSUMPTION AND REVENUE DECLINE RATES BY MATURITY

The following table sets forth the “breakeven” constant annual rate of consumption decline at which each maturity of the Series 2020 Bonds would be paid in full at maturity.

The table below assumes that Tobacco Settlement Revenues are received based on the application of the Tobacco Settlement Revenues Projection Methodology and Assumptions and the Bond Structuring Methodology and Assumptions described herein under “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” with the exception that the Volume Adjustment utilizes the listed “breakeven” assumption for cigarette consumption in the U.S.

No assurance can be given that actual cigarette consumption in the U.S. will be as assumed, that actual County population during the term of the Series 2020 Bonds will be as assumed, or that the other assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions, including the market shares of the OPMs and the SPMs and the assumption that there will not be an NPM Adjustment, will be consistent with future events. If actual events deviate from one or more of the assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions, the amount of Tobacco Settlement Revenues available to the Agency to pay the principal or Accreted Value of and interest on the Series 2020 Bonds could be adversely affected. See “RISK FACTORS” herein.

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213 Series 2020 Bonds Consumption Decline Rates By Maturity*(1)(2)

[TABLE TO COME]

______* Preliminary, subject to change. (1) Assumes the Liquidity Reserve Accounts are used to pay debt service on each respective series of Series 2020 Bonds, as applicable, on or prior to the final maturity of such series without a payment default. (2) Based on application of the Tobacco Settlement Revenues Projection Methodology and Assumptions described in “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein with the exception of the Volume Adjustment, which utilizes the above listed annual declines in cigarette consumption in the U.S. beginning in 2020.

214 Projected Series 2020 Bonds Debt Service Under a [–____%*] Constant Annual Cigarette Shipment Decline

Set forth below is a schedule showing the projected debt service on the Series 2020A Senior Bonds and the Series 2020B Subordinate Bonds calculated based on a [–____%*] constant annual “breakeven” consumption decline rate for the Series 2020B Subordinate Bonds. [TABLE TO COME] ______* Preliminary, subject to change. (1) Based on application of the Tobacco Settlement Revenues Projection Methodology and Assumptions described in “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” herein with the exception of the Volume Adjustment, which utilizes [*–____%*] annual declines in cigarette consumption in the U.S. beginning in 2020. (2) Includes application of the Optional Clean-Up Call. (3) Reflects Turbo Redemptions of Series 2020B Subordinate Bonds at their then Accreted Value. (4) Includes all Interest, Series 2020A Senior Bonds principal and mandatory Sinking Fund Installments, Series 2020B Subordinate Bonds projected Turbo Redemptions, less assumed earnings and releases on the Liquidity Reserve Accounts.

215 TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS

Introduction

The following discussion describes the methodology and assumptions used to project the amount of Tobacco Settlement Revenues to be received by the Agency (the “Tobacco Settlement Revenues Projection Methodology and Assumptions”), as well as the methodology and assumptions used to structure the Turbo Term Bond Maturities and Projected Turbo Redemptions for the Series 2020B Subordinate Bonds (the “Bond Structuring Methodology and Assumptions”).

The assumptions set forth herein are only assumptions, and no guarantee can be made as to the ultimate outcome of certain events assumed herein. Actual results will differ from those assumed, and any such difference could have a material effect on the receipt of Tobacco Settlement Revenues. See “RISK FACTORS” herein. The discussions are followed by a table of projected Tobacco Settlement Revenues to be received by the Indenture Trustee.

In projecting the amount of Tobacco Settlement Revenues to be received by the Indenture Trustee, (a) the forecast of cigarette consumption in the U.S. developed by IHS Global and contained within the Tobacco Consumption Report is assumed to represent actual cigarette shipments measured pursuant to the MSA for the years covered by the report, (b) the forecast developed by the California State Department of Finance and published on its website as of the date hereof at http://www.dof.ca.gov/Forecasting/Demographics/Projections/ under the title “P-1: State Population Projections (2010-2060) – Total Population by County (1-year increments)” (the “Population Forecast”) is assumed to represent the population of the State and the County to be determined by the 2020, 2030, 2040 and 2050 Official United States Decennial Census, and (c) such forecasts are applied to calculate Annual Payments to be made by the PMs pursuant to the MSA. See “RISK FACTORS—Risks Relating to the Tobacco Consumption Report” and “— Potential Payment Adjustments for Population Changes Under the MOU and the ARIMOU” herein. The calculation of payments required to be made was performed in accordance with the terms of the MSA, the MOU and the ARIMOU; however, as described below, certain further assumptions were made with respect to shipments of cigarettes in the U.S. and the applicability to such payments of certain adjustments and offsets set forth in the MSA (including an assumption that there will not be an NPM Adjustment). Such further assumptions may differ materially from the actual information utilized by the MSA Auditor in calculating payments due under the MSA as adjusted by the NPM Adjustment Settlement Agreement.

It was assumed, among other things described below, that:

• the PMs make all payments required to be made by them pursuant to the MSA,

• the aggregate Market Share of the OPMs remains constant throughout the forecast period at 81.36127%, based on the NAAG-reported OPM shipments as a percentage of total net market shipments in sales year 2019 (measuring roll-your-own shipments at 0.0325 ounces per cigarette conversion rate), and

• the aggregate Market Share of the SPMs remains constant at 10.22611%, based on the NAAG-reported market share for SPMs in sales year 2019 (measuring roll-your-own shipments at 0.09 ounces per cigarette conversion rate).

Tobacco Settlement Revenues Projection Methodology and Assumptions

Cigarette Shipments under the MSA

In applying the consumption forecast from the Tobacco Consumption Report, it was assumed that U.S. cigarette consumption forecasted by IHS Global was equal to the number of cigarettes shipped in and to the U.S., the District of Columbia and Puerto Rico, which, when adjusted by the aggregate OPM Market Share, is the number used to determine the Volume Adjustment. The Tobacco Consumption Report states that the quantities of cigarettes shipped and cigarettes consumed may not match at any given point in time as a result of various factors, such as inventory adjustments, but are substantially the same when compared over a period of time. IHS Global’s forecast

216 for U.S. cigarette consumption is set forth in the Tobacco Consumption Report in APPENDIX A—“TOBACCO CONSUMPTION REPORT.” The Tobacco Consumption Report contains a discussion of the assumptions underlying the projections of cigarette consumption contained therein. No assurance can be given that future consumption will be consistent with that projected in the Tobacco Consumption Report. See “RISK FACTORS – Risks Relating to the Tobacco Consumption Report.”

Annual Payments

In accordance with the Tobacco Settlement Revenues Projection Methodology and Assumptions, the anticipated amounts of Annual Payments for the years [*2021-20__*] to be made by the OPMs were calculated by applying the adjustments applicable to the base amounts of Annual Payments set out in the MSA, in order, as described below. The anticipated amounts of Annual Payments for the years [*2021-20__*] to be made by the SPMs were calculated by (i) multiplying the base amounts of Annual Payments by the Adjusted SPM Market Share (as described below) and (ii) then applying the adjustments applicable to the Annual Payments for SPMs set out in the MSA, in order, as described below.

Inflation Adjustment. First, the Inflation Adjustment was applied to the schedule of base amounts for the Annual Payments set forth in the MSA. The inflation adjustment rate is compounded annually at the greater of 3.0% or the percentage increase in the actual Consumer Price Index for all Urban Consumers (“CPI-U”) in the prior calendar year as published by the Bureau of Labor Statistics (released each January). The calculations of Annual Payments assume the minimum Inflation Adjustment Percentage provided in the MSA of 3.0% in every year since inception, except for calendar years 2000, 2004, 2005, and 2007 where the actual percentage increases in CPI-U of approximately 3.387%, 3.256%, 3.416%, and 4.081%, respectively, were used. Thereafter, the annual Inflation Adjustment Percentage was assumed to be the 3.0% minimum provided in the MSA. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments—Inflation Adjustment” for a description of the formula used to calculate the Inflation Adjustment.

Volume Adjustment. Next, the Annual Payments calculated after application of the Inflation Adjustment were adjusted for the Volume Adjustment by multiplying the forecast for U.S. cigarette consumption contained in the Tobacco Consumption Report by the assumed aggregate Market Share of the OPMs (81.36127% as described above). No add-back or benefit was assumed from any Income Adjustment. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments—Volume Adjustment” for a description of the formula used to calculate the Volume Adjustment.

Previously Settled States Reduction. Next, the amounts calculated for each year after application of the Inflation Adjustment and the Volume Adjustment were reduced by the Previously Settled States Reduction, which applies only to the payments owed by the OPMs. The Previously Settled States Reduction is not applicable to Annual Payments owed by the SPMs. The Previously Settled States Reduction is 11.0666667% for each year.

Non-Settling States Reduction. The Non-Settling States Reduction was not applied to the Annual Payments because such reduction has no effect on the amount of payments to be received by states that remain parties to the MSA. Thus, the Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that the State will remain a party to the MSA.

NPM Adjustment. The Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that the State has diligently enforced and will diligently enforce a Qualifying Statute that is not held to be unenforceable, and except as described in the immediately following sentences, the NPM Adjustment is assumed not to reduce Annual Payments. In accordance with the 2018-2022 NPM Adjustments Settlement Agreement, the State has agreed to transition year payment adjustments relating to sales years 2018-2022 equal to 25% of the State’s Allocable Share of the Potential Maximum NPM Adjustment (as defined in the NPM Adjustment Settlement Agreement) for such years, which will result in credits against each PM’s annual MSA payment due in 2021-2025, respectively. It is further assumed that with respect to sales years 2018 and 2019 the PMs have previously withheld from the State’s Annual Payments due in 2019 and 2020, respectively, amounts equal to their payment credits for such sales years. Therefore, it is assumed that (i) the Annual Payments due in 2021 and 2022 will not be reduced, as the release of amounts previously withheld by the PMs will equally offset the PMs’ payment credits in such years and (ii) the Annual Payments due in 2023-2025 will be reduced by 25% of the Potential Maximum NPM Adjustment for sales

217 years 2020-2022, respectively. It is further assumed that the Potential Maximum NPM Adjustment for sales years 2020-2022 is equal to 18.24% of the Annual Payment due in such years. For a discussion of the NPM Adjustment Settlement Agreement, see “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—NPM Adjustment Settlement” (see also APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” AND “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the NPM Adjustment Settlement Agreement and related extension settlements), and for a discussion of the State’s Qualifying Statute, which is the Model Statute, see “STATE LAWS RELATED TO THE MSA—California Qualifying Statute.”

Offset for Miscalculated or Disputed Payments. The Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that there will be no adjustments to the Annual Payments due to miscalculated or disputed payments.

Litigating Releasing Parties Offset. The Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that the Litigating Releasing Parties Offset will have no effect on payments.

Offset for Claims-Over. The Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that the Offset for Claims-Over will have no effect on payments.

Subsequent Participating Manufacturers. The Tobacco Settlement Revenues Projection Methodology and Assumptions treat the SPMs as a single manufacturer having executed the MSA on or prior to February 22, 1999 for purposes of calculating Annual Payments under Section IX(i) of the MSA. Further, the Market Share (as defined in the MSA) of the SPMs remains constant at 10.22611% (measuring roll your own cigarettes at 0.09 ounces per cigarette conversion rate) as described above. Because the 10.22611% Market Share exceeds the greater of (i) the SPM’s 1998 Market Share or (ii) 125% of its 1997 Market Share, the SPMs are assumed to make Annual Payments in each year. For purposes of calculating Annual Payments owed by the SPMs, their aggregate adjusted Market Share (“Adjusted SPM Market Share”) is equal to (y) the SPM Market Share (assumed at 10.22611%) less the Base Share (assumed at 3.63656%) divided by (z) the aggregate Market Share of the OPMs at 81.26878% (measuring roll your own cigarettes at 0.09 ounces per cigarette conversion rate), or 8.108340%.

Allocation Percentage for the State of California Under the MSA. The amount of Annual Payments, after application of the Inflation Adjustment, the Volume Adjustment and the Previously-Settled States Reduction for each year, was multiplied by the allocation percentage for Annual Payments for the State under the MSA (12.7639554%) in order to determine the amount of Annual Payments in each year to be made by the PMs to be allocated to the State.

Current Allocation Percentage for the County Under the MOU and the ARIMOU. 45% of the State’s receipts of Annual Payments under the MSA are allocated to the State’s counties under the MOU and the ARIMOU. Each county receives its allocation of the 45% based upon the county’s population relative to the population of the State according to the then most recent Official United States Decennial Census. According to the 2010 Official United State Decennial Census, the County had a population of 348,432 and the State had a population of 37,253,956, which currently results in the County receiving an allocation of 0.420880% of the State’s Annual Payments (348,432 ÷ 37,253,956 × 0.45 = 0.420880%).

Future Allocation Percentage for the County Under the MOU and the ARIMOU — Population Adjustment. By law, the Official United States Decennial Census is required to be published by March 31 of the calendar year following each census. It is therefore assumed that the next succeeding ten Annual Payments following such publication will reflect a revised County population adjustment. Based on the Population Forecast, the percentage of the State’s Annual Payments allocated to the County from [*2021-20__*] will be as follows:

Portion of State’s Official United Application to Department of Department of Annual Payments States Decennial Annual Payments Finance Projection: Finance Projection: Allocated to the Census Beginning County State County 2020 2021 400,434 40,129,160 0.449038%

218 2030 2031 456,935 42,263,654 0.486519% 2040 2041 511,683 43,946,643 0.523948% 2050 2051 556,006 44,856,461 0.557785%

California Escrow Agent Fees. The annual California Escrow Agent Fee (assumed to be $36,000) is assumed to be allocated among the Participating Jurisdictions, including the County, under the MOU and the ARIMOU based upon their then allocable payment percentages. Therefore, it is assumed that $359 is deducted from the County’s allocation of Annual Payments in 2021-2030, $389 in 2031-2040, $419 in 2041-2050 and $446 in 2051-2060.

Receipt and Application of Tobacco Settlement Revenues

It is assumed that the Indenture Trustee will receive Tobacco Settlement Revenues ten days after April 15 in each year, commencing in 2021, and will apply receipts, together with interest earnings in the Accounts held by the Indenture Trustee, as provided in the Indenture. See “SECURITY FOR THE BONDS—Flow of Funds.”

Projection of Tobacco Settlement Revenues to be Received by the Indenture Trustee

The following table shows the projection of Tobacco Settlement Revenues to be received by the Indenture Trustee in each year through 20__, calculated in accordance with the Tobacco Settlement Revenues Projection Methodology and Assumptions and using the forecast contained within the Tobacco Consumption Report and the Department of Finance’s Population Forecast. The forecast contained within the Tobacco Consumption Report for U.S. cigarette consumption is set forth in APPENDIX A—“TOBACCO CONSUMPTION REPORT” attached hereto. See APPENDIX A hereto for a discussion of the assumptions underlying the projection of cigarette consumption contained in the Tobacco Consumption Report. See also “RISK FACTORS—Risks Relating to the Tobacco Consumption Report.” The Department of Finance’s Population Forecast is described in “DEPARTMENT OF FINANCE POPULATION FORECAST.” See also “RISK FACTORS—Potential Payment Adjustments for Population Changes Under the MOU and the ARIMOU.”

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219

Projection of Tobacco Settlement Revenues to be Received by the Indenture Trustee*

[*TABLE TO COME*]

______* Preliminary, subject to change.

220 Bond Structuring Methodology and Assumptions

The Bond Structuring Methodology and Assumptions of the Series 2020 Bonds and the forecast contained within the Tobacco Consumption Report and the Department of Finance’s Population Forecast were applied to the projections of Tobacco Settlement Revenues described above. See “SUMMARY OF THE TOBACCO CONSUMPTION REPORT”, APPENDIX A—“TOBACCO CONSUMPTION REPORT” and “DEPARTMENT OF FINANCE POPULATION FORECAST.” See also “RISK FACTORS—Risks Relating to the Tobacco Consumption Report” and “—Potential Payment Adjustments for Population Changes Under the MOU and the ARIMOU.”

The Bond Structuring Methodology and Assumptions are as follows:

Delivery Date

The Series 2020 Bonds are assumed to be delivered on ______, 2020.

Issue Size

The objective in issuing the Series 2020 Bonds is to provide proceeds in an amount, together with other available funds, sufficient to: (1) refund the Series 2005 Bonds by establishing an irrevocable escrow for the defeasance and redemption of the Series 2005 Bonds, (2) fund the Senior Liquidity Reserve Account for the Series 2020A Senior Bonds and the Subordinate Liquidity Reserve Account for the Series 2020B-1 Subordinate Bonds, (3) fund the Senior Debt Service Account and the Subordinate Debt Service Account in amounts sufficient to pay interest on the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds on [*June 1, 2021*], (4) fund a payment to the registered owner of the Residual Certificate for certain capital improvements of the County and (5) pay the costs of issuance of the Series 2020 Bonds.

Maturity Dates

The stated maturity dates of the Series 2020 Bonds are set forth on the inside cover page hereof.

Mandatory Redemptions of Outstanding Bonds

All mandatory redemptions of the Series 2020 Bonds, including Turbo Redemptions and the mandatory clean-up call redemption of the Series 2020B Subordinate Bonds, are assumed to be made on June 1 in any year to the extent that sufficient Collateral is available therefor.

Interest Rates

The Series 2020 Bonds bear or accrete interest at the rates shown on the inside cover page hereof. Interest is calculated on the basis of a 360-day year consisting of twelve 30-day months.

Liquidity Reserve Accounts

The Senior Liquidity Reserve Account will be fully funded on the Closing Date at the Senior Liquidity Reserve Requirement of $______*. The Subordinate Liquidity Reserve Account will be fully funded on the Closing Date at the Subordinate Liquidity Reserve Requirement of $______.*

Operating Expense Assumptions

Annual Operating Expenses of the Agency have been assumed at $______through the Fiscal Year ending June 30, 2022 (the Operating Cap for such year) and are assumed to be inflated in each year thereafter by 3%. No Operating Expenses are assumed in excess of the annual Operating Cap, and no arbitrage payments, rebate or penalties

* Preliminary, subject to change.

221 were assumed to be paid since it has been assumed that the yield on the invested bond proceeds of the Series 2020 Bonds will not exceed the arbitrage yield on the Series 2020 Bonds. Further, it is assumed that the Agency will have sufficient funds on deposit in the Operating Account as of the Closing Date to fund its Operating Expenses for Fiscal Year 2021.

Debt Service Accounts

[As of the Closing Date, the Senior Debt Service Account and the Subordinate Debt Service Account will be funded from amounts currently on deposit in the debt service account held for the Series 2006 Bonds in amounts sufficient to pay interest on the Series 2020A Senior Bonds and the Series 2020B-1 Subordinate Bonds on June 1, 2021.]

Interest Earnings

Amounts on deposit in the Senior Liquidity Reserve Account and in the Subordinate Liquidity Reserve Account are assumed to be invested at a rate of 0.25% per annum with earnings distributed annually on each June 1. Amounts in all other Accounts under the Indenture are assumed to be invested at a rate of 0.00% per annum. No interest earnings have been assumed on the Annual Payments prior to the time it is assumed they will be received by the Indenture Trustee.

Miscellaneous

The Tobacco Settlement Revenues Projection Methodology and Assumptions assume that there is no optional redemption of the Series 2020 Bonds, that no Event of Default occurs, and that no PM makes a Lump Sum Payment or Total Lump Sum Payment under the MSA. It is further assumed that all Distribution Dates occur on the first day of each June and December, whether or not such date is a Business Day.

No assurance can be given that actual cigarette consumption in the United States during the term of the Series 2020 Bonds will be as assumed, that actual County population during the term of the Series 2020 Bonds will be as assumed, or that the other assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions and Bond Structuring Methodology and Assumptions, including that certain adjustments (including the NPM Adjustment) and offsets will not apply to payments due under the MSA, will be consistent with future events. If actual events deviate from one or more of the assumptions underlying the Tobacco Settlement Revenues Projection Methodology and Assumptions and Bond Structuring Methodology and Assumptions, the amount of funds available to the Agency to pay the principal or Accreted Value of and interest on the Series 2020 Bonds and to make Turbo Redemptions on the Series 2020B Subordinate Bonds could be adversely affected. See “RISK FACTORS” and “LEGAL CONSIDERATIONS” herein.

RISK FACTORS

The Series 2020 Bonds differ from many other state and local governmental securities in a number of respects. Prospective investors should carefully consider the factors set forth below regarding an investment in the Series 2020 Bonds, as well as the other information contained in this Offering Circular. One or a combination of the risk factors set forth below, and other risks, may materially adversely affect the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full, and could have a material adverse effect on the liquidity and/or market value of the Series 2020 Bonds.

The discussion of certain risks has been compiled from certain publicly available documents of the tobacco companies and their current or former parent companies, certain publicly available analyses of the domestic tobacco industry and other public sources. Certain of those companies currently file annual, quarterly and certain other reports with the Securities and Exchange Commission (the “SEC”). Such reports are available on the SEC’s website (www.sec.gov) and upon request from the SEC’s Investor Information Service, 100 F Street, NE, Washington, D.C. 20549 (phone: (800) SEC-0330 or (202) 551-8090; e-mail: [email protected]). To the extent that any risk discussed

222 in this section describes the domestic tobacco industry and litigation relating thereto, the Agency does not warrant the accuracy or completeness of such information.

The risks set forth herein do not comprise all of the risks associated with the Tobacco Settlement Revenues, nor does the order of presentation necessarily reflect the relative importance of the various and separate risks. Certain general categories of risks discussed below include, among others, payment decreases under the terms of the MSA and the NPM Adjustment Settlement, declines in cigarette consumption, federal and state regulation, alternative tobacco products, litigation and bankruptcy. There can be no assurance that other risk factors will not become material in the future. See also “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT,” “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY” APPENDIX A “TOBACCO CONSUMPTION REPORT” and APPENDIX C-1 — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” APPENDIX C-2 — “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” and APPENDIX C-3 — “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT.” Additional risk factors are set forth in “LEGAL CONSIDERATIONS.”

Payment Decreases Under the Terms of the MSA

Adjustments to MSA Payments

The MSA provides that the amounts payable by the PMs are subject to numerous adjustments, offsets and recalculations, some of which are material, including without limitation, the NPM Adjustment discussed below. Any such adjustment could trigger the Offset for Miscalculated or Disputed Payments. See “— Disputed MSA Payments and Potential for Significant Future Year Offsets to MSA Payments” and “— NPM Adjustment” below for a description of disputes concerning MSA payments and the calculation thereof, including a settlement that the State and certain other Settling States entered into regarding the NPM Adjustment. Any such adjustments, offsets and recalculations could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

An amendment to the MSA (as described further herein, the “PSS Credit Amendment”) has been proposed that would allow SPMs to elect to receive a reduction in their MSA payments in an amount equal to a percentage of the fees paid to Previously Settled States pursuant to state legislation in the Previously Settled States requiring tobacco product manufacturers that did not sign onto the Previously Settled State Settlements to pay a fee to such Previously Settled States. By its terms, the PSS Credit Amendment will only take effect if and when all Settling States having aggregate Allocable Shares equal to at least 99.937049% (the equivalent of the aggregate Allocable Share of the 46 states that are Settling States), and all OPMs and Commonwealth Brands, Inc., have executed the PSS Credit Amendment. No assurance can be given as to if or when such an amendment will take effect. Further, no assurance can be given as to whether the PSS Credit Amendment, if and when it takes effect, will reduce the amount of Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds. See “RISK FACTORS— Other Risks Relating to the MSA and Related Statutes—Amendments, Waivers and Termination,” “RISK FACTORS—Reliance on State Enforcement of the MSA; State Impairment,” “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments—Previously Settled States Reduction—PSS Credit Amendment” and “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—NPM Adjustment Settlement.” See also “SECURITY FOR THE BONDS – Non- Impairment Covenants” herein.

Disputed MSA Payments and Potential for Significant Future Year Offsets to MSA Payments

Disputes concerning Annual Payments (as well as Strategic Contribution Payments) and their calculations may be raised up to four years after the respective Payment Due Date (as defined in the MSA). The resolution of disputed payments that arise in prior years may result in the application of offsets against subsequent payments. Disputes could result in the future diversion of disputed payments to the Disputed Payments Account under the MSA (the “DPA”), the withholding of all or a portion of any disputed amounts, or the application of offsets against future payments. Any such disputes or the resolution thereof could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

223 Miscalculations or recalculations by the MSA Auditor or disputed calculations by any of the parties to the MSA have resulted and could in the future result in offsets to, or delays in disbursements of, payments to the Settling States pending resolution of the disputed item in accordance with the provisions of the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments—Offset for Miscalculated or Disputed Payments.”

The cash flow assumptions used to prepare the debt service coverage table herein do not factor in an offset for miscalculated or disputed payments or any release of funds currently held in the DPA, and include an assumption that there will not be an NPM Adjustment. Adjustments in future Tobacco Settlement Revenues, including adjustments pursuant to the NPM Adjustment Settlement described below, could be different from those projected. See “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS,” APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” AND “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT.”

NPM Adjustment

General. One of the adjustments under the MSA is the “NPM Adjustment,” which operates in certain circumstances to reduce the payments of the PMs under the MSA in the event of losses in Market Share by PMs (who are subject to the payment obligations and marketing restrictions of the MSA) to non-participating manufacturers (“NPMs”) (who are not subject to such obligations and restrictions), during a calendar year as a result of such PMs’ participation in the MSA. Under the MSA, three conditions must be met in order to trigger an NPM Adjustment for one or more Settling States: (1) a Market Share loss for the applicable year must exist (as described herein); (2) a nationally recognized firm of economic consultants must determine that the disadvantages experienced as a result of the provisions of the MSA were a “significant factor” contributing to the Market Share loss for the year in question; and (3) the Settling States in question must be found to not have diligently enforced their Qualifying Statutes. If the PMs make a claim for an NPM Adjustment for any particular year and a Settling State is determined to be one of a few states (or the only state) not to have diligently enforced its Qualifying Statute in such year, the amount of the NPM Adjustment applied to such Settling State in the year following such determination could be as great as the amount of Annual Payments that could otherwise have been received by such Settling State in such year.

NPM Adjustment Settlement. On December 17, 2012, terms of a settlement were agreed to in the form of a term sheet (the “NPM Adjustment Settlement Term Sheet”) by 19 jurisdictions (including the State), the OPMs and certain SPMs regarding claims related to the 2003 through 2012 NPM Adjustments and the determination of subsequent NPM Adjustments. Subsequently, seven additional jurisdictions (Oklahoma, Connecticut, South Carolina, Indiana, Kentucky, Rhode Island and Oregon) joined the NPM Adjustment Settlement Term Sheet. On October 10, 2017, a final settlement agreement (the “NPM Adjustment Settlement Agreement”) became effective, incorporating the terms of, and superseding, the NPM Adjustment Settlement Term Sheet, settling disputes related to the 2013 through 2015 NPM Adjustments. According to Altria Group, Inc. (“Altria”, the parent company of Philip Morris) in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, 10 additional jurisdictions (Alaska, Colorado, Delaware, Hawaii, Maine, North , Pennsylvania, South Dakota, Utah and Vermont) joined the NPM Adjustment Settlement Agreement in 2018, settling disputes related to the 2004-2017 NPM Adjustments. On various dates between June 14, 2018 and November 27, 2018, the initial 26 jurisdictions (including the State) that had joined the NPM Adjustment Settlement Agreement, and 39 tobacco manufacturers (including Philip Morris, Reynolds Tobacco, Liggett, Imperial Tobacco, and Lorillard), executed the 2016 and 2017 NPM Adjustments Settlement Agreement (the “2016 and 2017 NPM Adjustments Settlement Agreement”) settling disputes related to the 2016- 2017 NPM Adjustments, as further described below. On various dates in July through September 2020, the State and other states among the initial 26 jurisdictions that joined the NPM Adjustment Settlement Agreement, and signatory tobacco manufacturers, executed the 2018 Through 2022 NPM Adjustments Settlement Agreement (the “2018-2022 NPM Adjustments Settlement Agreement”) settling disputes related to the 2018-2022 NPM Adjustments, as further described below. In the first quarter of 2020, the PMs agreed that, with respect to the 10 jurisdictions that joined the NPM Adjustment Settlement Agreement in 2018, certain conditions set forth in the NPM Adjustment Settlement Agreement had been met, and as a result, the PMs’ settlement with Pennsylvania was extended to include NPM

224 Adjustments for 2018-2024 and settlements with the other nine states were extended to include NPM Adjustments for 2018-2019, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. The signatory jurisdictions to the NPM Adjustment Settlement Term Sheet, the NPM Adjustment Settlement Agreement and related joinder agreements, the 2016 and 2017 NPM Adjustments Settlement Agreement and the 2018- 2022 NPM Adjustments Settlement Agreement, as applicable, are referred to herein as the “NPM Adjustment Settlement Signatories”, and the settlements effected by the NPM Adjustment Settlement Term Sheet, the NPM Adjustment Settlement Agreement and related joinder agreements, the 2016 and 2017 NPM Adjustments Settlement Agreement and the 2018-2022 NPM Adjustments Settlement Agreement, as applicable, are referred to herein as the “NPM Adjustment Settlement.”

On March 12, 2013, a three-judge panel that was selected to arbitrate the 2003 NPM Adjustment claims (the “Arbitration Panel”) issued a Stipulated Partial Settlement and Award (the “NPM Adjustment Stipulated Partial Settlement and Award”), in which it ruled that the NPM Adjustment Settlement Term Sheet was binding on the signatory jurisdictions and directed PricewaterhouseCoopers LLP, the independent auditor under the MSA (the “MSA Auditor”), to implement the terms of the NPM Adjustment Settlement Term Sheet. The Arbitration Panel concluded in the NPM Adjustment Stipulated Partial Settlement and Award that neither the NPM Adjustment Stipulated Partial Settlement and Award nor the NPM Adjustment Settlement Term Sheet constitutes an amendment to the MSA that would require the consent of any non-signatory jurisdiction. No assurance can be given, however, that a court would not hold that the NPM Adjustment Stipulated Partial Settlement and Award and the NPM Adjustment Settlement constitute amendments to the MSA. See “—Other Risks Relating to the MSA and Related Statutes—Amendments, Waivers and Termination” and “—Reliance on State Enforcement of the MSA; State Impairment.”

Under the NPM Adjustment Settlement, each of the then NPM Adjustment Settlement Signatories received in connection with the April 2013 MSA payment its allocable share of over $4.7 billion then on deposit in the DPA (for a total of approximately $1.76 billion plus earnings released to the NPM Adjustment Settlement Signatories from the DPA). In addition, under the NPM Adjustment Settlement, PMs received certain reductions and credits in April 2013 through April 2017, as described herein, to reflect a percentage of the NPM Adjustment Settlement Signatories’ aggregate share of the 2003 through 2012 NPM Adjustment claims that were settled and to reflect a percentage of the NPM Adjustment Settlement Signatories’ aggregate share of the NPM Adjustment claims for transition years 2013- 2014. PMs received a reduction in April 2018 to reflect a percentage of the NPM Adjustment Settlement Signatories’ aggregate share of the NPM Adjustment claim for 2015, which, in October 2017, the PMs and the NPM Adjustment Settlement Signatories agreed pursuant to the NPM Adjustment Settlement Agreement to settle as a transition year. PMs received a reduction in April 2019 to reflect a percentage of the NPM Adjustment Settlement Signatories’ aggregate share of the NPM Adjustment claim for 2016, and received a reduction in April 2020 to reflect a percentage of the NPM Adjustment Settlement Signatories’ aggregate share of the NPM Adjustment claim for 2017, each of which sales years was settled under the 2016 and 2017 NPM Adjustments Settlement Agreement described below. PMs will receive reductions in April 2021-2025 (with respect to the MSA payments payable to the initial 26 jurisdictions, including the State, to have executed the NPM Adjustment Settlement Agreement) and in April 2022- 2026 (with respect to the MSA payments payable to any additional signatories to the 2018-2022 NPM Adjustments Settlement Agreement) to reflect a percentage of the NPM Adjustment Settlement Signatories’ aggregate share of the NPM Adjustment claims for 2018-2022, respectively, each of which sales years was settled under the 2018-2022 NPM Adjustments Settlement Agreement described below.

Pursuant to the 2016 and 2017 NPM Adjustments Settlement Agreement, the disputes relating to the 2016- 2017 NPM Adjustments were settled, providing for the following adjustments to the NPM Adjustments. First, the PM’s Annual Payments made for the benefit of the states signatory to the 2016 and 2017 NPM Adjustments Settlement Agreement (the “2016-17 Settlement Signatory States”) are not subject to downward adjustment pursuant to Section V.B of the NPM Adjustment Settlement Agreement (the “Section V.B Adjustment”) relating to Non-Compliant NPM Cigarettes (as defined herein) for the 2015 sales year. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—NPM Adjustment Settlement.” Second, in lieu of the 2016 NPM Adjustment and the 2017 NPM Adjustment (as defined in the NPM Adjustment Settlement Agreement), the PMs received, as applicable to the 2016-17 Settlement Signatory States, the following adjustments applied to their MSA payments due April 16, 2019 (with respect to the 2016 NPM Adjustment) and April 16, 2020 (with respect to the 2017 NPM Adjustment): (A) an aggregate adjustment applicable to Annual Payments, subject to quarterly recognition provisions under the NPM Adjustment Settlement Agreement, equal to 25% of the

225 Potential Maximum 2016 NPM Adjustment and 2017 NPM Adjustment applicable to Annual Payments and to Strategic Contribution Payments (as applicable) multiplied by the aggregate Allocable Share of all 2016-17 Settlement Signatory States. Such aggregate amount is allocated to the PMs as provided in the 2016 and 2017 NPM Adjustments Settlement Agreement, and is allocated solely to and among the 2016-17 Settlement Signatory States, in proportion to their Allocable Shares and Strategic Contribution Payments Allocable Shares, as applicable; and (B) the amounts of the adjustments pursuant to clause (A) immediately above are determined based on the Market Share Loss for 2016 and the Potential Maximum NPM Adjustment for 2016, and the Market Share Loss for 2017 and the Potential Maximum NPM Adjustment for 2017, as applicable, as determined by the MSA Auditor in the latest Final Calculation or Revised Final Calculation preceding the April 16, 2018 Payment Due Date and the April 15, 2019 Payment Due Date, respectively, and are not subject to the Section V.B Adjustment for the 2016 sales year. Capitalized terms used in this paragraph and not defined have the meanings given in the 2016 and 2017 NPM Adjustments Settlement Agreement. See APPENDIX C-2 — “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the 2016 and 2017 NPM Adjustments Settlement Agreement.

Pursuant to the 2018-2022 NPM Adjustments Settlement Agreement, the disputes relating to the 2018-2022 NPM Adjustments were settled, and sales years 2018-2022 were added as transition years as described in Section V of the NPM Adjustment Settlement Agreement. The states that execute the 2018-2022 NPM Adjustments Settlement Agreement (the “2018-2022 Settlement Signatory States”) will not be subject to the NPM Adjustment for sales years 2018-2022 (resulting in certain amounts released to the 2018-2022 Settlement Signatory States on or before the April 2021 MSA payment date relating to the 2018 NPM Adjustment claims and on or before the April 2022 MSA payment date relating to the 2019 NPM Adjustment claims, and resulting in no withholdings by the PMs in payment years 2020-2022 with respect to 2018-2022 Settlement Signatory States), and the PMs will receive credits relating to sales years 2018-2022 as described as follows. In lieu of the 2018 through 2022 NPM Adjustments with respect to sales years 2018-2022 applicable to the 2018-2022 Settlement Signatory States, each PM will receive a transition year adjustment to its Annual Payment in payment years 2021-2025 (with respect to the initial 26 jurisdictions, including the State, that executed the NPM Adjustment Settlement Agreement) and payment years 2022-2026 (with respect to any additional signatories to the 2018-2022 NPM Adjustments Settlement Agreement), allocated solely to and among the respective 2018-2022 Signatory States as such States will direct. As to each PM, the amount of its transition year adjustment credit for a sales year applied in a given payment year shall equal the product of (a) the Potential Maximum NPM Adjustment allocated to that PM (as calculated by the MSA Auditor in the Final Notice for such sales year as revised in the year immediately preceding application of the credit, but which shall not change regardless of any subsequent revision of the Final Notice by the MSA Auditor), (b) the aggregate Allocable Share of the applicable group of 2018-2022 Settlement Signatory States (for example, the initial 26 jurisdictions that executed the NPM Adjustment Settlement Agreement), and (c) 25%. For each of the 2018-2022 transition years, the adjustment for SET- Paid NPM Sales will continue to apply and the adjustment for Non-SET-Paid NPM Sales will not apply. Capitalized terms used in this paragraph and not defined have the meanings given in the 2018-2022 NPM Adjustments Settlement Agreement. See APPENDIX C-3 — “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the 2018-2022 NPM Adjustments Settlement Agreement. In connection with its execution of the 2018-2022 NPM Adjustments Settlement Agreement, the State also signed the optional Document Production Agreement, Bootleg Agreement, Reporting Agreement and Tribal Compacting Agreement contained as exhibits to the 2018-2022 NPM Adjustments Settlement Agreement.

The NPM Adjustment Settlement also details the determination of NPM Adjustments for the NPM Adjustment Settlement Signatories for sales years subsequent to those that were settled. Under the NPM Adjustment Settlement, for state cigarette excise tax-paid NPM sales of “non-compliant NPM cigarettes” (defined in the NPM Adjustment Settlement, with certain exceptions, as any NPM cigarette on which state cigarette excise tax was paid but for which escrow is not deposited as required by the Model Statute, either by payment by the NPM or by collection upon a bond, or for which escrow was impermissibly released or refunded), the adjustment of PM payments due from signatory PMs is three times the per-cigarette escrow deposit rate contained in the Model Statute for the year of the sale, including the inflation adjustment in the statute (subject to a safe harbor). For NPM sales for which state cigarette excise tax was not paid, the total NPM Adjustment liability, if any, of each NPM Adjustment Settlement Signatory under the original formula for a year would be reduced by a percentage, as described herein.

The NPM Adjustment Settlement provides that the arbitration regarding NPM Adjustment Settlement Signatories’ diligent enforcement for a specified year will not commence until the diligent enforcement arbitration for

226 such year begins as to NPM Adjustment Settlement Non-Signatories (as defined below) (with an exception for an accelerated schedule as described therein). In the interim, pending the ultimate outcome of the applicable proceedings with respect to NPM Adjustments, the signatory PMs will deposit into the DPA on the next April’s MSA payment date the NPM Adjustment Settlement Signatories’ aggregate Allocable Share of the potential maximum NPM Adjustment for such sales year, and the PMs and the NPM Adjustment Settlement Signatories will jointly instruct the MSA Auditor to release promptly the entire amount deposited to the DPA and distribute it among the PMs and the NPM Adjustment Settlement Signatories according to a formula as described herein. In the NPM Adjustment Settlement, the NPM Adjustment Settlement Signatories agree that diligent enforcement will be determined as to them in a single arbitration each year. The NPM Adjustment Settlement also provides that, except for the DPA deposit (and subsequent release) described above, and except in certain other cases (primarily, if the dispute was noticed for arbitration by the PM and the party-selected arbitrator has not been appointed for over one year from the date notice was first given despite good faith efforts by the PM), the PMs will not withhold payments or pay into the DPA based on a dispute arising out of the NPM Adjustment as set forth in the NPM Adjustment Settlement. For a discussion of the terms of the NPM Adjustment Settlement and related matters, see “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—NPM Adjustment Settlement.” See APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” AND “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the NPM Adjustment Settlement Agreement and related extension settlements. See also “STATE LAWS RELATED TO THE MSA—State Statutory Enforcement Framework—Indian Country Cigarette Sales.”

The Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that the State has diligently enforced and will diligently enforce a Qualifying Statute that is not held to be unenforceable, and that there will not be an NPM Adjustment. Adjustments pursuant to the NPM Adjustment Settlement could be different from those projected and could have an adverse effect on the amount and/or timing of Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds on a timely basis or in full. See “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.”

Jurisdictions that did not sign the NPM Adjustment Settlement (the “NPM Adjustment Settlement Non- Signatories”, which term as used herein excludes the State of New York, which entered into a separate settlement with the PMs relating to the NPM Adjustment) objected to the NPM Adjustment Settlement Term Sheet and NPM Adjustment Stipulated Partial Settlement and Award. States that were found to be non-diligent in the 2003 NPM Adjustment arbitration challenged the judgment reduction method applied by the Arbitration Panel as to those states, arguing that their respective share of the 2003 NPM Adjustment should be reduced because the NPM Adjustment Settlement Signatories should not have been deemed diligent for purposes of the calculation, and in certain cases their share was ordered to be reduced. The status of these cases is discussed in “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—2003 NPM Adjustment Arbitration Results and Disputes Concerning the NPM Adjustment Settlement Term Sheet and Stipulated Partial Settlement and Award.” No assurance can be given that other challenges to the NPM Adjustment Stipulated Partial Settlement and Award or NPM Adjustment Settlement will not be commenced in other MSA courts or that the NPM Adjustment Settlement Non-Signatories’ pending arbitrations relating to the 2004 NPM Adjustment and future arbitrations relating to subsequent sales years’ NPM Adjustments will not have an adverse effect on NPM Adjustment Settlement Signatories such as the State. If any such challenge is successful, there could be an adverse effect on the amount and/or timing of Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds on a timely basis or in full.

Furthermore, no assurance can be given as to the implementation in future years of the NPM Adjustment Settlement by the MSA Auditor with regard to the State, or as to whether or not the NPM Adjustment Settlement will be revised and any consequences thereto. Any such development could have an adverse effect on the amount and/or timing of Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds on a timely basis or in full.

227 Declines in Cigarette Consumption

Cigarette consumption in the U.S. has declined significantly over the last several decades. According to the Tobacco Consumption Report, a Centers for Disease Control and Prevention (“CDC”) study released in 2019 reported that approximately 34 million American adults were current smokers in 2018, representing approximately 13.7% of the population age 18 and older, a decline from 14.0% in 2017, 15.5% in 2016, and 19.4% in 2010. NAAG reported that total industry domestic cigarette shipment volume was 225.1 billion in 2019, 236.9 billion cigarettes in sales year 2018, 248.8 billion cigarettes in sales year 2017, and 260.4 billion cigarettes in sales year 2016 (including a roll-your- own equivalent of 0.0325 ounces per cigarette), as compared to shipments of approximately 391.3 billion in 2006. According to the Tobacco Consumption Report, consumption fell to 225.1 billion cigarettes (including a roll-your- own equivalent of 0.0325 ounces per cigarette) in 2019, and in April 2020 NAAG reported an industry volume decline for 2019 of 5.0% (which followed declines of 4.5% in 2017 and 4.8% in 2018), an acceleration in the industry decline rate that coincided with the extraordinary growth of the e-cigarette , as discussed below. In its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, Altria stated that a growing number of adult smokers are converting from cigarettes to exclusive use of non-combustible tobacco product alternatives, and that the significant growth of the e-vapor category in recent years negatively impacted consumption levels and sales volume of cigarettes. Altria’s estimate for the U.S. adjusted cigarette industry volume decline rate for 2020 is 2% - 3.5%, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Cigarette Shipment Trends.”

A trend in the percentage of the population that smokes cigarettes does not necessarily correlate with the trends in the volume of cigarettes sold. As noted in the Tobacco Consumption Report, because of the growing number of “light smokers” (those who smoke just a few cigarettes per day), the rate of decline in the overall prevalence of smoking has slowed, while the rate of decline of the volume of cigarettes consumed has accelerated.

Payments under the MSA are determined in part by the volume of cigarettes sold by the PMs in the U.S. cigarette market. U.S. cigarette consumption in recent years has been reduced because of price increases, restrictions on advertising and promotions, increases in excise taxes, smoking bans in public places, the raising of the minimum age to possess or purchase tobacco products, other increased regulation such as state and local bans on characterizing flavors, a decline in the social acceptability of smoking, health concerns, funding of smoking prevention campaigns, increased pressure from anti-tobacco groups, increased usage of alternative products such as e-cigarettes and other vapor products, curtailments in the chain of distribution, and other factors. U.S. cigarette consumption is expected to continue to decline for the reasons stated above and others. Continuing declines in cigarette consumption could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. The following factors, among others, may negatively affect cigarette consumption in the U.S.

The Regulation of Tobacco Products by the FDA May Adversely Affect Overall Consumption of Cigarettes in the U.S. and the Operations of the PMs

The Family Smoking Prevention and Act (the “FSPTCA”), signed by President Obama on June 22, 2009, granted the U.S. Food and Drug Administration (the “FDA”) broad authority over the manufacture, sale, marketing and packaging of tobacco products. The legislation, among other things, requires larger and more severe health warnings on cigarette packs and cartons, bans the use of certain descriptors on tobacco products, requires the disclosure to consumers of ingredients and additives, requires FDA pre-market review for new or modified products, and allows the FDA to place more severe restrictions on the advertising, marketing and sales of cigarettes. Since the passage of the FSPTCA, the FDA, among other things, has prohibited fruit, candy or clove flavored cigarettes (menthol is currently exempted from this ban), prohibited misleading marketing terms (“Light,” “Low,” and “Mild”) for tobacco products, rejected applications for the introduction of new tobacco products into the market, and issued its final rule subjecting e-cigarettes and certain other tobacco products to FDA regulations. In July 2017, the FDA announced its intent to develop a comprehensive plan for tobacco and regulation and is considering, among other matters, the issues surrounding the presence of menthol in cigarettes. On March 15, 2018, as part of this comprehensive plan, the FDA announced an Advance Notice of Proposed Rulemaking (“ANPRM”) to explore and seek comment on lowering the nicotine in cigarettes to minimally or non-addictive levels, but on November 20, 2019, the FDA removed its nicotine reduction plan from its current regulatory agenda (although the FDA may revive the

228 plan in the future). On March 21, 2018, the FDA issued an additional ANPRM regarding the role that flavors, including menthol, play in initiation, use and cessation of use of tobacco products. In April 2018, as part of the comprehensive plan, the FDA announced a Youth Tobacco Prevention Plan focused on stopping the use by youth of tobacco products, particularly e-cigarettes. In a press release dated November 15, 2018, the FDA announced its intent to advance a Notice of Proposed Rulemaking that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, based on comments received from the March 21, 2018 ANPRM. In the March 15, 2018 announcement, the FDA also stated that it is starting new work to re-evaluate and modernize its approach to the development and regulation of medicinal nicotine replacement products such as gums, patches and lozenges. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Regulatory Issues— FSPTCA.”

Tobacco manufacturers have filed suit regarding certain provisions of the FSPTCA and actions taken thereunder. In August 2009, a group of tobacco manufacturers and a tobacco retailer filed a complaint against the United States in the U.S. District Court for the Western District of Kentucky, Commonwealth Brands, Inc. v. U.S., in which they asserted that various provisions of the FSPTCA violate their free speech rights under the First Amendment, constitute an unlawful taking under the Fifth Amendment, and are an infringement on their Fifth Amendment due process rights. In March 2012, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court’s earlier decision upholding the FSPTCA’s restrictions on the marketing of modified-risk tobacco products, the FSPTCA’s bans on event sponsorship, branding non-tobacco merchandise, and free sampling, and the requirement that tobacco manufacturers reserve significant packaging space for textual health warnings. However, the Sixth Circuit affirmed the district court’s grant of summary judgment to plaintiff manufacturers on the unconstitutionality of the FSPTCA’s restriction of tobacco advertising to black and white text. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Regulatory Issues—FSPTCA Litigation” for a discussion of this case.

On June 22, 2011, the FDA issued a final regulation for the imposition of larger, graphic health warnings on cigarette packaging and advertising, which was scheduled to take effect September 22, 2012 (but which the FDA was enjoined from enforcing, as described below). On August 16, 2011, tobacco companies filed a lawsuit against the FDA in the U.S. District Court for the District of Columbia, R. J. Reynolds Tobacco Co. v. U.S. Food and Drug Administration, challenging the FDA’s final regulation specifying nine new graphic “warnings” pursuant to the FSPTCA and seeking a declaratory judgment that the final regulation violates the plaintiffs’ rights under the First Amendment to the U.S. Constitution and the Administrative Procedure Act (“APA”). On August 24, 2012, the U.S. Court of Appeals for the District of Columbia Circuit affirmed a February 29, 2012 decision of the district court that invalidated the graphic warning rule. On March 19, 2013, the FDA announced that it would undertake research to support a new rulemaking on different warning labels consistent with the FSPTCA. In October 2016, several public health groups filed suit in the Federal District Court for the District of Massachusetts to force the FDA to issue final rules requiring graphic warnings on cigarette packs and advertising (American Academy of Pediatrics, et al v. United States Food and Drug Administration). In a March 5, 2019 Memorandum and Order, the court directed the FDA to submit by March 15, 2020 a final rule mandating color graphic warnings on cigarette packs and in cigarette advertisements as required by the FSPTCA. On March 17, 2020, the FDA issued a final rule to require new health warnings on cigarette packages and in cigarette advertisements. The warnings feature textual statements with photo- realistic color images depicting some of the lesser-known but serious health risks of cigarette smoking. Beginning October 16, 2021, the new cigarette health warnings will be required to appear prominently on cigarette packages and in advertisements, and must be randomly and equally displayed and distributed on cigarette packages and rotated quarterly in cigarette advertisements. The final cigarette health warnings each consist of one of 11 textual warning statements paired with an accompanying photo-realistic image depicting the negative health consequences of smoking. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Regulatory Issues” for a discussion of these cases and several other cases.

The FDA has yet to issue final guidance with respect to many provisions of the FSPTCA. It is likely that future regulations promulgated by the FSPTCA, including regulation of menthol (including an outright ban thereof) or, if the FDA adds back a nicotine reduction plan to its regulatory agenda, decreasing the permitted level of nicotine (though not to zero), as discussed herein, could result in a decrease in cigarette sales in the U.S., and an increase in costs to PMs, potentially resulting in a material adverse effect on the PMs’ financial condition, results of operations and cash flows. Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that in addition to the payment of user fees required by the FSPTCA, compliance with the FSPTCA’s regulatory

229 requirements has resulted and will continue to result in additional costs and that although the amount of additional compliance and related costs has not been material in any given quarter or year to date period, such costs could become material, either individually or in the aggregate, to one or more of its tobacco subsidiaries. Additionally, the FDA’s rules regarding clearance for new or modified cigarette products could adversely affect PMs’ access to the market and could result in the removal of products from the market. President Trump’s budget plan released February 10, 2020 proposed to move the Center for Tobacco Products out of the FDA and to create a new agency within the U.S. Department of Health and Human Services to focus on tobacco regulation, which, according to the Trump administration, would have greater capacity to respond strategically to the growing complexity of new tobacco products.

The effect of the foregoing factors could be to reduce consumption of cigarettes in the U.S. and adversely affect the operations of the PMs, thereby reducing payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

Concerns That Mentholated Cigarettes May Pose Greater Health Risks Could Result in Further Federal, State and Local Regulation Which Could Adversely Affect the Volume of Cigarettes Sold in the U.S. and Thus Payments Under the MSA

According to research published in Nicotine and Tobacco Research in 2018, the market share was 31.5% during 2011-2015. News reports have estimated the 2018 market share of menthol cigarettes at 35%. Some plaintiffs and constituencies, including public health agencies and non-governmental organizations, have claimed or expressed concerns that mentholated cigarettes may pose greater health risks than non-mentholated cigarettes, including concerns that mentholated cigarettes may make it easier to start smoking and harder to quit, and increase smoking initiation among youth and the incidence of smoking among youth.

The FSPTCA established the Tobacco Products Scientific Advisory Committee (“TPSAC”) and directed the TPSAC to evaluate issues surrounding the use of menthol as a flavoring or ingredient in cigarettes. In addition, the legislation permits the FDA to ban menthol upon a finding that such a prohibition would be appropriate for the public health. The TPSAC or the Menthol Report Subcommittee held meetings throughout 2010 and 2011 to consider the issues surrounding the use of menthol in cigarettes. At a March 2011 meeting, TPSAC presented its findings that menthol likely increases experimentation and regular smoking, menthol likely increases the likelihood and degree of addiction for youth smokers, non-white menthol smokers (particularly African-Americans) are less likely to quit smoking and are less responsive to certain cessation medications, and consumers continue to believe that smoking menthol cigarettes is less harmful than smoking nonmenthol cigarettes as a result of the cigarette industry’s historical marketing. TPSAC’s overall recommendation to the FDA was that “removal of menthol cigarettes from the marketplace would benefit public health in the United States.” In July 2013, the FDA released a preliminary evaluation on menthol cigarettes, finding among other things that menthol cigarettes likely pose a public health risk above that seen with non-menthol cigarettes. On November 8, 2013, twenty-seven jurisdictions (including the State) sent a letter to the FDA in support of a ban on menthol-flavored cigarettes. In an August 2016 letter, the African American Tobacco Control Leadership Council asked President Obama to direct the FDA to issue a proposed rule to remove all products, including mentholated cigarettes, from the marketplace. On March 21, 2018, as part of the FDA’s comprehensive plan for tobacco and nicotine regulation, the FDA issued an ANPRM regarding the role that flavors (including menthol) play in initiation, use and cessation of use of tobacco products. The FDA is not required to follow the TPSAC’s recommendations, and the FDA has not yet taken any final action with respect to menthol use. In a press release dated November 15, 2018, the FDA announced its intent to advance a Notice of Proposed Rulemaking that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, based on comments received from the March 21, 2018 ANPRM. There is no timeline or statutory requirement for the FDA to act on the TPSAC’s recommendations. In June 2020, the African American Tobacco Control Leadership Council and the Action on Smoking and Health filed a complaint against the FDA, seeking to compel the FDA to fulfill its mandate to take action on the FDA’s conclusions that it would benefit the public health to add menthol to the list of prohibited characterizing flavors and therefore ban it from sale. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Regulatory Issues‒FSPTCA Litigation” for a discussion on litigation regarding the TPSAC.

230 If the FDA determines that the regulation of menthol is warranted, the FDA could promulgate regulations that, among other things, could result in a ban on or a restriction on the use of menthol in cigarettes. Several jurisdictions have already enacted bans on menthol and other characterizing flavors. The State of Maine, in 2007, became the first state to enact a statute that prohibits the sale of cigarettes and cigars that have a characterizing flavor, including menthol. In June 2017, San Francisco amended its city health code to prohibit tobacco retailers from selling flavored tobacco products, including flavored e-cigarettes and menthol cigarettes, and voters approved the measure on June 5, 2018. Los Angeles County banned the sale of all flavored tobacco products, including menthol cigarettes, effective May 1, 2020. In November 2019, Massachusetts banned the sale of all flavored tobacco products, effective June 1, 2020 for menthol cigarettes. On August 28, 2020, California enacted a statute prohibiting the retail sale of all flavored tobacco products, including menthol-flavored cigarettes and e-cigarettes which becomes effective January 1, 2021. On February 28, 2020, the U.S. House of Representatives approved a bill banning the sale of all flavored cigarettes and e-cigarettes. Any ban or material limitation on the use of menthol in cigarettes could materially adversely affect the results of operations, cash flow and financial condition of the PMs that sell large quantities of mentholated cigarettes (especially Reynolds Tobacco, a significant portion of whose sales, after the merger with Lorillard, is dependent on the Newport brand of mentholated cigarettes), and could materially adversely affect the overall sales volume of cigarettes by the PMs, thereby reducing payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

The Volume of Cigarettes Sold by PMs in the U.S. Cigarette Market is Expected to Continue to Decline as a Result of Increases in Cigarette Excise Taxes

In the U.S., tobacco products are subject to substantial and increasing federal and state excise taxation, which has a negative effect on consumption. On April 2, 2009, Congress increased the federal excise tax per pack of cigarettes to $1.01 per pack (an increase of $0.62), and significantly increased taxes on other tobacco products. All of the states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands currently impose cigarette taxes, which ranged from $0.17 per pack in Missouri to $5.10 per pack in Puerto Rico, according to the Campaign for Tobacco-Free Kids as of June 15, 2020. In recent years, almost every state has increased tobacco taxes, according to the Campaign for Tobacco-Free Kids. In particular, in California, a $2.00 per pack increase in the State’s cigarette excise tax (in addition to the State’s then current $0.87 per pack excise tax) was passed by voters on November 8, 2016, effective April 1, 2017. In addition to federal and state excise taxes, certain city and county governments also impose substantial excise taxes on tobacco products sold, such as New York, Philadelphia and Chicago. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, between the end of 1998 (the year that the MSA was executed) and July 24, 2020, the weighted-average state cigarette excise tax increased from $0.36 to $1.83 per pack. During 2018, Kentucky, Oklahoma, and Washington, D.C. enacted cigarette excise tax increases, and according to the Tobacco Consumption Report, New Mexico and Illinois increased their cigarette excise taxes during 2019. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, one state has increased cigarette excise taxes in 2020, and various increases are under consideration or have been proposed. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Regulatory Issues—Excise Taxes” for a further description of excise taxes on cigarettes.

It is expected that state and local governments will continue to raise excise taxes on cigarettes in future years (including as a result of the COVID-19 pandemic, discussed herein, as a way for governments to address potential budget shortfalls). Increased excise taxes are likely to result in declines in overall sales volume and shifts by consumers to less expensive brands, deep discount brands, untaxed cigarettes sold on certain Native American reservations and duty-free shops, counterfeit brands or pipe tobacco for roll-your-own consumers. Such trends and reductions in consumption will lead to reductions of payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

The Volume of Cigarettes Sold by PMs in the U.S. Cigarette Market is Expected to Continue to Decline Because of Legislation Raising the Minimum Age for Purchase and Possession of Cigarettes

U.S. cigarette consumption is expected to continue to decline due to legislation raising the minimum age to possess or purchase tobacco products. On December 20, 2019, the President of the United States signed legislation,

231 effective January 1, 2020, banning the sale of tobacco products to anyone under the age of 21 (federal law had previously set the minimum age at 18). This federal legislation had been preceded by various states having raised the minimum age to purchase tobacco from 18 to 21 (or 19, in certain states), beginning in 2016 with Hawaii setting the minimum age at 21, and by numerous municipalities having enacted similar legislation. According to Altria, the following states enacted such legislation: Ohio (21), (21), Vermont (21), New York (21), Texas (21), Connecticut (21), Nebraska (19), Delaware (21), Illinois (21), Arkansas (21), Washington (21), Utah (21), Virginia (21), California (21), Hawaii (21), Alabama (19), Alaska (19), New Jersey (21), Oregon (21), Maine (21) and Massachusetts (21). According to the Campaign for Tobacco-Free Kids, prior to the federal legislation raising the minimum age, at least 540 localities had raised the tobacco age to 21.

On March 12, 2015, the Institute of Medicine of the National Academy of Sciences released a report concluding that raising the minimum legal age to 21 would likely decrease smoking prevalence by 12% among today’s teenagers when they become adults. Declines in consumption due to the increased minimum age to possess or purchase tobacco products could lead to reductions of payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

Increased Restrictions on Smoking in Public Places Could Adversely Affect U.S. Tobacco Consumption and Therefore Amounts to be Paid Under the MSA

In recent years, federal, state and many local and municipal governments and agencies, as well as private businesses, have adopted legislation, regulations, insurance provisions or policies which prohibit, restrict, or discourage smoking generally, smoking in public buildings and facilities, public housing, stores, restaurants and bars, and smoking on airline flights and in the workplace. Other similar laws and regulations are currently under consideration and may be enacted by state and local governments in the future. Restrictions on smoking in public and other places may lead to a decrease in the number of people who smoke or a decrease in the number of cigarettes smoked or both. Smoking bans have recently been extended by many state and local governments to outdoor public areas, such as beaches, parks and space outside restaurants, and others may do so in the future. Increased restrictions on smoking in public and other places have caused a decrease, and may continue to cause a decrease, in the volume of cigarettes that would otherwise be sold in the U.S. absent such restrictions, which could lead to reductions of payments under the MSA and could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY— Regulatory Issues—State and Local Regulation.”

Several of the PMs and Their Competitors Have Developed Alternative Tobacco and Cigarette Products, Including Electronic Cigarettes and Vaporizers, Sales of Which Do Not Currently Result in Payments Under the MSA, and Have Announced Long-Term Goals of Ending the Sale of Traditional Cigarettes in Favor of Such Alternative Products

Certain of the major cigarette makers and other manufacturers have developed (or acquired) and marketed alternative cigarette products the shipments of which do not give rise to payment obligations under the MSA. For example, numerous manufacturers have developed and are marketing “electronic cigarettes” or “e-cigarettes,” which are not tobacco products but are battery powered devices that vaporize liquid nicotine which is then inhaled. E- cigarettes do not currently constitute “cigarettes” within the meaning of the MSA (as deemed by the manufacturers and certain states) because they do not contain or burn or heat tobacco. The growth in this area includes devices called “vaporizers,” which are larger, customizable devices that hold more liquid, produce larger vapor clouds and last longer. They allow users to mix and match hardware and refill cartridges with liquid bought in bulk, so that they are cheaper than e-cigarettes. E-cigarettes and other vapor products are currently not subject to the advertising restrictions to which tobacco products are subject. In addition, many jurisdictions do not subject electronic cigarettes or other vapor products to excise taxes. According to research cited by the Campaign for Tobacco-Free Kids, in 2017 there were more than 430 brands of e-cigarettes, and over 15,500 unique e-cigarette flavors were available online. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—E-Cigarettes and Vapor Products.” See also “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—

232 Regulatory Issues—FSPTCA” for a discussion of the regulation of e-cigarettes and vapor products by the FDA as well as by various states and municipalities.

According to the Tobacco Consumption Report, 2018 sales of electronic cigarettes in the U.S. were estimated at over $7 billion, with rapid growth in the two years prior, led by sales of the JUUL brand. JUUL is an e-cigarette shaped like a USB flash drive. No single e-cigarette manufacturer dominated the U.S. market through 2013. However, sales of BAT’s e-cigarette devices surged 146% during 2014 and led the market well into 2017. During 2016-2017, Juul Labs, Inc.’s sales increased 641 percent — from 2.2 million JUUL devices sold in 2016 to 16.2 million devices sold in 2017. By December 2017, according to the Tobacco Consumption Report, JUUL was the most popular , accounting for approximately three-fourths of the e-cigarette market. According to a CDC release dated October 2, 2018, based on an analysis of retail sales data from 2013-2017, sales of JUUL grew more than seven- fold from 2016 to 2017, and held the greatest share of the U.S. e-cigarette market by December 2017. Sales of e- cigarettes have been projected to reach $9 billion for 2019, according to the Campaign for Tobacco-Free Kids.

In September 2017, Philip Morris International announced that it would contribute approximately $80 million each year for the following 12 years to a non-profit organization called the Foundation for a Smoke-Free World, to fund research on smoke-free alternatives, among other things. In addition, in January 2018, Philip Morris International announced that its long-term goal is to replace its traditional cigarettes with smoke-free alternative products. On May 22, 2018, Altria announced the creation of two divisions within Altria—one division for traditional cigarettes, pipe tobacco, cigars and snuff, and a second division for innovative, non-combustible, reduced-risk products such as vapor products. Altria reported that the new structure is expected, among other things, to accelerate innovation.

Cigarette manufacturers also market other types of alternative products, such as moist snuff, “snus” (a smokeless, spitless tobacco product that originated in Sweden), disposable nicotine discs, dissolvable tobacco tablets, orbs, strips and sticks, and oral tobacco-derived nicotine pouches. According to a CDC report published November 9, 2018, 2.1% of U.S. adults were current users of smokeless tobacco (defined as chewing tobacco, snuff, dip, snus, or dissolvable tobacco) in 2017.

Electronic cigarettes, other vapor products and smokeless tobacco products are viewed by some as alternatives to cigarette smoking that may lead to cigarette smoking cessation. According to the CDC, e-cigarettes are not currently approved by the FDA as a quit smoking aid; however, e-cigarettes may help non-pregnant adult smokers quit smoking cigarettes if used as a complete substitute for all cigarettes and other smoked tobacco products. The Tobacco Consumption Report notes that a new British study provides evidence that e-cigarettes are more effective as a smoking cessation aid than other forms of nicotine replacement products, and also notes that a study from the Centre for Substance Use Research in the United Kingdom found that at least 28.3% of adult smokers had quit smoking cigarettes completely after using a JUUL vaporizer for 3 months. Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that up until the second half of 2019 the e-vapor category had experienced significant growth in recent years, and the number of adults who exclusively use e-vapor products also increased during that time which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes. Altria noted in such SEC filing that growth in the e-vapor category has been negatively impacted by legislative and regulatory activities.

It has been reported that increases in cigarette taxes have caused an increase in the sale of e-cigarettes and other alternatives to cigarettes. According to the Tobacco Consumption Report, certain sources have shown that e- cigarette use is associated with quit attempts by smokers; that youth use of e-cigarettes is unlikely to increase the number of future cigarette smokers; and that the substantial increase in e-cigarette use among U.S. adult smokers this decade was associated with a statistically significant increase in the smoking cessation rate at the population level; however, the Tobacco Consumption Report cites two studies published in 2019 that found that teens who use e- cigarettes or other tobacco-related products are more likely to later initiate cigarette use. Growth in the electronic cigarette, vapor product and smokeless tobacco product markets may have an adverse effect on the traditional cigarette market. If consumers use such alternative products in lieu of traditional cigarettes containing nicotine or to quit smoking, it could reduce the size of the cigarette market. In addition, recreational marijuana, which, according to the American Nonsmokers’ Rights Foundation (“ANRF”) as of August 15, 2020, has been legalized in the states of Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Washington and Vermont (as well as Washington, D.C.), may be an alternative to cigarette smoking and reduce the size of the cigarette market.

233 Furthermore, because many alternative cigarette products continue to be deemed not to constitute “cigarettes” under the MSA, as these products gain market share of the domestic cigarette market to the detriment of traditional cigarettes, payments under the MSA may decrease, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—E-Cigarettes and Vapor Products,” “—Heat-Not-Burn Tobacco Products” and “—Smokeless Tobacco Products.”

U.S. Tobacco Companies are Subject to Significant Limitations on Advertising and Marketing Cigarettes That Could Negatively Affect Sales Volume

Television and radio advertisements of tobacco products have been prohibited since 1971. U.S. tobacco companies generally cannot use billboard advertising, cartoon characters, sponsorship of concerts, non-tobacco merchandise bearing brand names and various other advertising and marketing techniques. In addition, the MSA prohibits the targeting of youth in advertising, promotion or marketing of tobacco products. Accordingly, the tobacco companies have determined not to advertise cigarettes in magazines with large readership among people under the age of 18. Under the FSPTCA, which grants authority over the regulation of tobacco products to the FDA, the FDA has issued rules restricting access and marketing of cigarettes and smokeless tobacco products to youth, and in March 2020 the FDA issued a final rule to require larger, color graphic warnings on cigarette packs and in cigarette advertisements as required by the FSPTCA, as discussed herein. In addition, many states, cities and counties have enacted legislation or regulations further restricting tobacco advertising, marketing and sales promotions, and others may do so in the future. Additional restrictions may be imposed or agreed to in the future. These limitations significantly impair the ability of tobacco product manufacturers to launch new premium brands. Moreover, these limitations may make it difficult for PMs to maintain sales volume of cigarettes in the U.S., which could lead to reductions of payments under the MSA and could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

As discussed above, electronic cigarettes and other vapor products are not currently subject to the advertising restrictions to which tobacco products are subject, and the FDA did not include advertising restrictions in its final regulations on e-cigarettes and other vapor products. Therefore, e-cigarettes and other vapor products, which can currently be marketed more extensively than traditional cigarettes and other tobacco products, could gain market share to the detriment of the traditional cigarette market. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—E-Cigarettes and Vapor Products.”

Federal, State and Local Anti-Smoking Campaigns Could Negatively Affect Cigarette Sales Volume

Federal, state and local anti-smoking campaigns have resulted and may continue to result in a decline in cigarette consumption. For example, the FDA launched an integrated anti-smoking campaign targeting teenagers, including the “Real Cost” campaign that targets young people aged 12-17 years and shows the costs and health consequences associated with tobacco use. The FDA reported that the “Real Cost” campaign prevented nearly 350,000 youth aged 11 to 18 nationwide from smoking during 2014-2016 and announced the campaign’s expansion in May 2018. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY— Regulatory Issues—Other Federal Action.” A decline in cigarette consumption as a result of such anti-smoking campaigns could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

The Distribution Chain for Cigarettes May Continue to be Curtailed, Which Could Negatively Affect Sales Volume

Certain stores have ceased the sale of tobacco products. The retail chain store Target reportedly stopped selling tobacco products in 1996. In September 2014 the national pharmacy chain CVS reportedly stopped selling all cigarettes and other tobacco products in all its stores (following a February 2014 announcement), citing that such sales were inconsistent with its mission. A group of state attorneys general have pressured large retail stores with pharmacies to take similar action, and in April 2014 several members of Congress called on these retailers to stop

234 selling cigarettes and other items containing tobacco. According to the ANRF, as of August 15, 2020, two states (Massachusetts and New York) and 242 cities and counties, located principally in California and Massachusetts, have tobacco-free pharmacy laws. In addition, Costco has also reportedly reduced the number of locations that sell cigarettes because of slowing demand, according to news reports in March 2016. Furthermore, certain municipalities have enacted laws limiting the number or density of cigarette retailers. For example, in 2014, San Francisco’s Tobacco Use Reduction Act was passed, which sets a cap on the number of tobacco retailers in each supervisory district and prohibits new stores from locating within 500 feet of schools or within 500 feet of another existing tobacco retailer. In 2016, Philadelphia’s Retailer Reduction Regulations were passed, setting a cap on the number of tobacco retailers allowed at one per 1,000 persons in each planning district and restricting any new retailer from locating within 500 feet of K-12 schools. In August 2017, New York City updated its comprehensive point-of-sale regulations, to, among other things, set a city-wide cap on retailer licenses at half of the current number in each district. Continued curtailment in the distribution of cigarettes could negatively affect sales volume, which could lead to reductions of payments under the MSA and could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

Smoking Cessation Products May Reduce Cigarette Sales Volumes and Adversely Affect Payments Under the MSA

Large pharmaceutical companies have developed and increasingly expanded their marketing of smoking cessation products. Companies such as GlaxoSmithKline, Johnson & Johnson, Novartis and Pfizer are well capitalized public companies that have entered this market and have the capability to fund significant investments in research and development and marketing of these products. Smoking cessation products can be obtained both in prescription and over-the-counter forms. From Nicorette gum in 1984, to nicotine patches, nicotine inhalers and tablets, as well as other non-pharmaceutical smoking cessation products, this market has evolved into a $1 billion business in the U.S., according to some estimates. Studies have shown that these programs are effective, and that excise taxes and smoking restrictions drive additional expenditures to the smoking cessation market. On March 15, 2018, as part of the FDA’s comprehensive plan for tobacco and nicotine regulation, the FDA announced that it is starting new work to re-evaluate and modernize its approach to the development and regulation of medicinal nicotine replacement products such as gums, patches and lozenges, and on August 3, 2018, the FDA released draft guidance aimed at supporting the development of novel, inhaled nicotine replacement therapies that could be submitted to the FDA for approval as new drugs, similar to current over-the-counter pharmaceutical nicotine replacement therapy products. Certain health insurance policies, including Medicaid and Medicare, cover various forms of smoking cessation treatments, making smoking cessation treatments more affordable for covered smokers. To the extent that existing smoking cessation products, new products or products used in combination become more effective and more widely available, or that more smokers use these products, sales volumes of cigarettes in the U.S. may decline, which could lead to reductions of payments under the MSA and could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY— Smoking Cessation Products.”

The U.S. Cigarette Industry is Subject to Significant Legal, Regulatory, and Other Requirements That Could Adversely Affect the Businesses, Results of Operations or Financial Condition of Tobacco Product Manufacturers

The consumption of cigarettes in the U.S., and therefore the amounts payable under the MSA and the Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds, could be materially adversely affected by new or future legal requirements imposed by legislative or regulatory initiatives, including but not limited to those relating to health care reform, climate change and environmental matters affecting the PMs and their manufacturing practices or business operations, which could adversely affect the businesses, results of operations or financial condition of the PMs.

The Availability of Counterfeit Cigarettes Could Adversely Affect Payments by the PMs Under the MSA

Sales of counterfeit cigarettes in the U.S. could adversely affect sales by the PMs of the brands that are counterfeited and potentially damage the value and reputation of those brands. Smokers who mistake counterfeit

235 cigarettes for cigarettes of the PMs may attribute quality and taste deficiencies in the counterfeit product to the actual branded products brands and discontinue purchasing such brands. Most significantly, the availability of counterfeit cigarettes together with substantial increases in excise taxes and other potential price increases of branded products could result in increased demand for counterfeit products that could have a material adverse effect on the sales volume of the PMs, resulting in lower payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

General Economic and Other Conditions, including the COVID-19 Pandemic, May Adversely Affect Consumption of Cigarettes and the Ability of the PMs to Continue to Operate, Reducing Their Sales of Cigarettes and Payments Under the MSA

The volume of cigarette sales in the U.S. is adversely affected by general economic downturns as smokers tend to reduce expenditures on cigarettes, especially premium brands, in times of economic hardship, such as the current national economic contraction resulting from the COVID-19 pandemic caused by the outbreak of novel coronavirus in late 2019 and the subsequent spread of the virus to the United States and around the world beginning in early 2020. The economic, social, and health disruptions and dislocations resulting from the COVID-19 pandemic may result in reduced consumption of cigarettes or increased cessation of smoking. In times of economic hardship, consumers may also become more price-sensitive, which may result in some consumers switching to lower priced, deep discount NPM brands, or counterfeit brands, or travelling to purchase untaxed NPM cigarettes on Native American reservations. In addition, according to the Tobacco Consumption Report, there is a correlation between an increase in the price of gasoline and a reduction in tobacco consumption. Reductions in cigarette consumption or changes in consumption habits to NPM cigarettes could lead to reductions of payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

The ability of the PMs to continue their operations selling cigarettes in the U.S. generally is dependent on the health of the overall economy and their ability to access the capital markets on favorable terms. In addition, the ability of the PMs to continue their operations manufacturing cigarettes is affected by, among other things, their production facilities, shifts in crops, government mandated prices, economic trade sanctions, geopolitical instability, production control programs and access to raw materials. In March 2020, Altria’s tobacco businesses temporarily suspended operations at several of their manufacturing facilities, including Philip Morris’s manufacturing facility in , Virginia (the primary facility for manufacturing Philip Morris cigarettes), as a result of the COVID-19 pandemic described above. Operations resumed under enhanced safety protocols in April 2020, and all of Altria’s tobacco manufacturing facilities are operational, according to Altria in its Form 10-Q filed with the SEC for the six- month period ended June 30, 2020. Some state governors also have issued executive orders requiring that certain businesses temporarily suspend operations for varying periods of time while the COVID-19 pandemic persists. According to Altria, operations of Altria’s subsidiaries, suppliers, distributors and distribution chain service providers and those of its investees could be suspended temporarily once or multiple times, or closed permanently, depending on various factors, including how long the COVID-19 pandemic persists and the extent to which state, local and federal governments, as well as foreign countries, impose restrictions on the operation of facilities or otherwise place limits on the supply and distribution chains. An extended disruption in operations experienced by a PM or in the supply or distribution of raw materials, goods or services by one or more key suppliers, distributors or distribution chain service providers could have a material adverse effect on the PM’s business, consolidated results of operations, cash flows or financial position. To the extent that overall economic or other conditions or constrained capital access materially adversely affects their operations, the PMs may manufacture and sell fewer cigarettes, potentially resulting in reduced payments under the MSA and reduced Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds.

The effects of the COVID-19 pandemic on cigarette consumption and the PMs’ operations heighten the risk of bankruptcy of a PM. See “—Bankruptcy of a PM May Delay, Reduce or Eliminate Payments Under the MSA” below.

236 If Litigation Challenging the MSA, the Qualifying Statutes and Related Legislation Were Successful, Payments Under the MSA Might be Suspended or Terminated

Certain parties, including smokers, smokers’ rights organizations, consumer groups, cigarette manufacturers, cigarette wholesalers, cigarette importers, cigarette distributors, Native American tribes, taxpayers, taxpayers’ groups and other parties have filed actions against some, and in certain cases all, of the signatories to the MSA, alleging, among other things, that the MSA and related legislation including the Settling States’ Qualifying Statutes, Allocable Share Release Amendments and Complementary Legislation (as each term is defined herein) as well as other legislation such as “Contraband Statutes” are void or unenforceable under certain provisions of law, such as the U.S. Constitution, state constitutions, federal antitrust laws, federal civil rights laws, state consumer protection laws, bankruptcy laws, federal cigarette advertising and labeling laws, unfair competition laws, and the North American Free Trade Agreement (including its successor the United States-Mexico-Canada Agreement, “NAFTA”). Certain of the lawsuits further sought, among other relief, an injunction against one or more of the Settling States from collecting any moneys under the MSA, an injunction barring the PMs from collecting cigarette price increases related to the MSA, a determination that the MSA is void or unenforceable, and an injunction against the enforcement of the Qualifying Statutes and the related legislation. In addition, class action lawsuits have been filed in several federal and state courts alleging that under the federal Medicaid law, any amount of tobacco settlement funds that the Settling States receive in excess of what they paid through the Medicaid program to treat tobacco related diseases should be paid directly to Medicaid recipients.

All of the judgments rendered to date on the merits have rejected challenges to the MSA, Qualifying Statutes and Complementary Legislation presented in the cases. Courts rendering those decisions include the U.S. Courts of Appeals for the Ninth Circuit, in Sanders v. Brown; the Second Circuit in Freedom Holdings v. Cuomo and Grand River Enterprises Six Nations, Ltd. v. King; the Tenth Circuit in KT & G Corp. v. Edmondson, and Hise v. Philip Morris Inc.; the Eighth Circuit in Grand River Enterprises v. Beebe; the Third Circuit in Mariana v. Fisher, and A.D. Bedell Wholesale Co. v. Philip Morris Inc.; the Fourth Circuit in Star Sci., Inc. v. Beales; the Fifth Circuit in Xcaliber Int’l Ltd. v. Caldwell and S&M Brands v. Caldwell; the Sixth Circuit in S&M Brands v. Cooper, S&M Brands, Inc. v. Summers, Tritent Inter’l Corp. v. Commonwealth of Kentucky and Vibo Corporation, Inc. d/b/a/ v. Conway, et al.; and multiple lower courts. In addition, in January 2011, an international arbitration tribunal rejected claims brought against the United States challenging MSA-related legislation in various states under NAFTA.

The MSA, Qualifying Statutes and related state legislation may continue to be challenged in the future, on the theories described above or for other reasons that are not described herein. A determination by a court that the MSA, the NPM Adjustment Settlement, the Qualifying Statutes or related state legislation (including the 2013 amendment to the State’s Qualifying Statute made in furtherance of the NPM Adjustment Settlement) is void or unenforceable could have a material adverse effect on the payments by the PMs under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. No assurance can be given that a court will not find the MSA, the NPM Adjustment Settlement, a Qualifying Statute, or related legislation to be unenforceable, unconstitutional, or void.

Although a determination that a Qualifying Statute is unconstitutional would have no effect on the enforceability of the MSA, such a determination could have a material adverse effect on payments to be made under the MSA and Tobacco Settlement Revenues available to the Agency if an NPM were to gain market share in the future and there occurred an effect on the market share of the PMs under the MSA. A determination that an Allocable Share Release Amendment is unenforceable would not constitute a breach of the MSA but could permit NPMs to exploit differences among states, and thereby potentially increase their market share at the expense of the PMs. A determination that the State’s Complementary Legislation is unenforceable would not constitute a breach of the MSA or affect the enforceability of the State’s Qualifying Statute; such a determination could, however, make enforcement of the State’s Qualifying Statute against NPMs more difficult for the State. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT” and “LEGAL CONSIDERATIONS—MSA and Qualifying Statute Enforceability.”

237 Litigation Seeking Monetary and Other Relief from Tobacco Industry Participants May Adversely Affect the Ability of the PMs to Continue to Make Payments Under the MSA

The tobacco industry has been the target of litigation for many years. Numerous legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of cigarettes are pending against the PMs, and it is likely that similar claims will continue to be filed for the foreseeable future. Both individual and class action lawsuits have been brought by or on behalf of smokers alleging various theories of recovery including that smoking has been injurious to their health, by non-smokers alleging harm from environmental tobacco smoke (“ETS”), also known as “secondhand smoke,” and by the federal, state and local governments seeking recovery of expenditures relating to the adverse effects on the public health caused by smoking. The claimants have sought recovery on a variety of legal theories, including, among others, negligence, fraud, misrepresentation, strict liability in tort, design defect, breach of warranty, enterprise liability (including claims asserted under the Racketeer Influenced and Corrupt Organizations Act (“RICO”)), civil conspiracy, intentional infliction of harm, injunctive relief, indemnity, restitution, unjust enrichment, public nuisance, unfair trade practices, claims based on antitrust laws and state consumer protection acts, and claims based on failure to warn of the harmful or addictive nature of tobacco products. Various forms of relief are sought, including compensatory and, where available, punitive damages in amounts ranging in some cases into the hundreds of millions or even billions of dollars. Claimants in some of the cases have sought treble damages, statutory damages, disgorgement of rights, equitable and injunctive relief and medical monitoring and smoking cessation programs, among other damages. It is possible that the outcome of these and similar cases, individually or in the aggregate, could result in bankruptcy or cessation of operations by one or more of the PMs. It is also possible that the PMs may be unable to post a surety bond in an amount sufficient to stay execution of a judgment in jurisdictions that require such bond pending an appeal on the merits of the case. Furthermore, even if the PMs are successful in defending some or all of the tobacco-related lawsuits against them, these types of cases are expensive to defend. The ultimate outcome of pending or future lawsuits is uncertain. Verdicts of substantial magnitude that are enforceable as to one or more PMs, if they occur, could encourage commencement of additional litigation, or could negatively affect perceptions of potential triers of fact with respect to the tobacco industry, possibly to the detriment of the PMs’ positions in pending litigation. A material increase in the number of pending claims could significantly increase defense costs and have a material adverse effect on the results of operations and financial condition of the PMs and could result in a PM insolvency. Adverse decisions in litigation against the tobacco companies could have an adverse effect on the industry overall. Any of the foregoing results could potentially lower the volume of cigarette sales and could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Civil Litigation” for more information regarding the litigation described below.

Engle Progeny

The case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994) was certified in 1996 as a class action on behalf of Florida residents, and survivors of Florida residents, who were injured or died from medical conditions allegedly caused by addiction to smoking and a multi-phase trial resulted in verdicts in favor of the class. During a three-phase trial, a Florida jury awarded compensatory damages to three individuals and approximately $145 billion in punitive damages to the certified class. In 2006, although the Florida Supreme Court vacated the punitive damages award and determined that the case could not proceed further as a class action, it permitted members of the Engle class to file individual claims, including claims for punitive damages, and held that these individual plaintiffs are entitled to rely on a number of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial, including that smoking cigarettes causes a number of diseases; that cigarettes are addictive or dependence-producing; and that the defendants were negligent, breached express and implied warranties, placed cigarettes on the market that were defective and unreasonably dangerous, and concealed or conspired to conceal the risks of smoking. In the wake of the Florida Supreme Court ruling, thousands of individuals that were members of the Engle class filed separate lawsuits in various state and federal courts in Florida seeking to benefit from the Engle findings (the “Engle Progeny Cases”). According to Altria in its Form 10-Q filed with the SEC for the six- month period ended June 30, 2020, as of July 24, 2020, approximately 1,400 state court Engle Progeny Cases were pending against Philip Morris or Altria asserting individual claims by or on behalf of approximately 1,800 state court plaintiffs. Most federal cases were settled, as discussed herein. It is not possible to predict the final outcomes of any of the Engle Progeny Cases, but such outcomes may materially adversely affect the operations of the defendants and

238 thus payments under the MSA and the Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Civil Litigation—Engle Progeny Cases.”

The DOJ Case

In August 2006, a final judgment and remedial order was entered in United States of America v. Philip Morris USA, Inc., et al. (U.S. District Court, District of Columbia, filed September 22, 1999) (the “DOJ Case”) and in June 2010 the U.S. Supreme Court denied all petitions for review of the case. Although the verdict did not award monetary damages to the plaintiff U.S. government, the final judgment and remedial order imposed a number of requirements on the defendants. Such requirements include, but are not limited to, corrective statements by defendants related to the health effects of smoking. The remedial order also placed certain prohibitions on the manner in which defendants market their cigarette products and enjoined any use of “lights” or similar product descriptors. On November 27, 2012, the district court released the text of the corrective statements that the defendants must make. In January 2013, defendants appealed to the U.S. Court of Appeals for the District of Columbia Circuit the district court’s November 2012 ruling on the text of the corrective statements, claiming a violation of free speech rights. On June 2, 2014, the U.S. District Court for the District of Columbia approved a joint motion by the U.S. government and the defendant tobacco companies, pursuant to which, for specified time periods following the date when all appeals are exhausted, corrective statements would be disseminated in newspapers (print and online), on television, on the tobacco companies’ websites, and on “onserts” affixed to cigarette packs. In June 2017, after the U.S. Court of Appeals ordered revisions to such statements, the U.S. District Court for the District of Columbia issued an order adopting modified corrective statements, featuring a preamble to the effect that a federal court has ordered the OPMs to make the specified statements, and featuring statements regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of significant health benefit from smoking “low tar,” “light,” “ultra light,” “mild” and “natural” cigarettes, the manipulation of cigarette design and composition to ensure optimum nicotine delivery, and the adverse health effects of exposure to second hand smoke. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the requirements related to corrective statements at point-of-sale remain outstanding, and in May 2019 the district court ordered a hearing on the point-of-sale signage issue; a hearing date has not been scheduled. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Civil Litigation—Health-Care Cost Recovery Cases.”

According to an October 2017 court order, in November 2017 the OPMs began running court-mandated announcements containing the agreed-upon corrective statements. Television announcements were between 30 and 45 seconds long and ran in prime time five days a week for 52 weeks. Full-page print ads appeared in at least 45 newspapers and ran on five weekends spread over approximately four months, and also appeared on the newspapers’ websites. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the parties reached agreement in April 2018 on the implementation details of the corrective statements remedy for “onserts” affixed to cigarette packs and for company-owned websites and, under the agreement, the corrective statements began appearing on websites in the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018. It is possible that the district court’s order, including the prohibitions on the use of the descriptors relating to low tar cigarettes and the stark text required in the corrective statements, will negatively affect the PMs’ sales of and profits from cigarettes, as well as result in significant compliance costs, which could materially adversely affect their payments under the MSA, which in turn could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

Non-Preemption of Claims

In December 2008, the U.S. Supreme Court in a purported “lights” class action, Good v. Altria Group, Inc., issued a decision that neither the Federal Cigarette Labeling and Advertising Act nor the Federal Trade Commission’s (“FTC”) regulation of cigarettes’ tar and nicotine disclosures preempts (or bars) some of plaintiffs’ claims. The decision also more broadly addresses the scope of preemption based on the Federal Cigarette Labeling and Advertising Act, and could significantly limit cigarette manufacturers’ arguments that certain of plaintiffs’ other claims in smoking and health litigation, including claims based on the alleged concealment of information with respect to the hazards of smoking, are preempted. In addition, the Supreme Court’s ruling could encourage litigation against cigarette

239 manufacturers regarding the sale of cigarettes labeled as “lights” or “low tar,” and it may limit cigarette manufacturers’ ability to defend such claims with regard to the use of these descriptors prior to the FDA’s ban thereof in June 2010. See “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Civil Litigation— Class Action Cases and Aggregated Claims.”

The PMs Have Substantial Payment Obligations Under Litigation Settlement Agreements Which, Together With Their Other Litigation Liabilities, May Adversely Affect the Ability of the PMs to Continue Operations in the Future

In 1998, the OPMs entered into the MSA with 46 states and 6 other U.S. jurisdictions to settle asserted and unasserted health care cost recovery and other claims of these jurisdictions. Certain U.S. tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (the “Previously Settled State Settlements” and, together with the MSA, are referred to as the “State Settlement Agreements”).

Under the State Settlement Agreements, the PMs are obligated to pay billions of dollars each year. Annual payments under the State Settlement Agreements are required to be paid in perpetuity and are based, among other things, on domestic market share and unit volume of domestic shipments. If the volume of cigarette sales by the PMs were materially reduced, these payment obligations, together with PMs’ other litigation liabilities, could materially adversely affect the business operations and financial condition of the PMs and potentially the ability of PMs to make payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT.”

Risks Relating to the Tobacco Consumption Report

The projections developed using the Tobacco Settlement Revenues Projection Methodology and Assumptions and described in “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” are based in part upon the tobacco consumption forecast contained in the Tobacco Consumption Report. No assurance can be given that actual future consumption will be consistent with that which is projected in the Tobacco Consumption Report. See “SUMMARY OF THE TOBACCO CONSUMPTION REPORT.” For a copy of the Tobacco Consumption Report, see APPENDIX A — “TOBACCO CONSUMPTION REPORT.”

Other Risks Relating to the MSA and Related Statutes

Severability

Most of the major provisions of the MSA are not severable. If a court materially modifies, renders unenforceable or finds unlawful any non-severable provision, the attorneys general of the Settling States and the OPMs are required by the MSA to attempt to negotiate substitute terms. If, however, any OPM does not agree to the substitute terms, the MSA terminates in all Settling States affected by the court’s ruling. Even if substitute terms are agreed upon, payments under such terms may be less than payments under the MSA or otherwise could be made according to or subject to different terms and conditions, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT— Severability.”

Amendments, Waivers and Termination

As a settlement agreement between the PMs and the Settling States, the MSA is subject to amendment in accordance with its terms, and may be terminated upon consent of the parties thereto. Parties to the MSA, including the State, may waive the performance provisions of the MSA. The Agency is not a party to the MSA; accordingly, the Agency has no right to challenge any such amendment, waiver or termination. While the economic interests of the State and the holders of the Series 2020 Bonds are expected to be the same in many circumstances, no assurance

240 can be given that such an amendment, waiver or termination of the MSA would not have a material adverse effect on the Agency’s ability to make payments to the holders of the Series 2020 Bonds. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Amendments and Waivers.”

Reliance on State Enforcement of the MSA; State Impairment

The State may not convey and has not conveyed to the County, the Corporation, the Agency or the Owners any right to enforce the terms of the MSA. Pursuant to its terms, the MSA, as it relates to the State, can only be enforced by the State. Although the State is entitled under the MOU to 50% of the State’s allocable share of each Annual Payment under the MSA, no assurance can be given that the State will enforce any particular provision of the MSA. Failure to do so may have a material adverse effect on the Agency’s ability to make payments to the holders of the Series 2020 Bonds. It is possible that the State could attempt to claim some or all of the Tobacco Settlement Revenues for itself or otherwise interfere with the security for the Series 2020 Bonds. In that event, the Owners, the Indenture Trustee, the Agency, the Corporation or the County may assert claims based on contractual, fiduciary or constitutional rights, but no prediction can be made as to the disposition of such claims. See “LEGAL CONSIDERATIONS.”

Amendment to the State’s Qualifying Statute

The MSA provides that if a state adopts the Model Statute or a Qualifying Statute but then repeals it or amends it in such fashion that it is no longer a Qualifying Statute, then such state will no longer be entitled to any protection from the NPM Adjustment. The State amended its Qualifying Statute in 2013 in furtherance of the NPM Adjustment Settlement and NPM Adjustment Stipulated Partial Settlement and Award, and the State received letters from counsels to the OPMs and certain SPMs to the effect that such amendment does not affect the status of the State’s Qualifying Statute as a Qualifying Statute under the MSA. See “STATE LAWS RELATED TO THE MSA— California Qualifying Statute.” No assurance can be provided, however, that a PM would not assert that, or a court or arbitrator would not determine that, the State’s Qualifying Statute as so amended would not continue to constitute a Qualifying Statute. Should it be determined that any amendments to the State’s Qualifying Statute cause it to no longer be a Qualifying Statute, then the State would no longer be entitled to any protection from the NPM Adjustment, and there could be substantial reductions in the amount of Tobacco Settlement Revenues available to the Agency to make payments on the Series 2020 Bonds. See “LEGAL CONSIDERATIONS—MSA and Qualifying Statute Enforceability.”

Bankruptcy of a PM May Delay, Reduce or Eliminate Payments Under the MSA

The enforceability of the rights and remedies of the Agency, the Indenture Trustee and the holders of the Series 2020 Bonds, and of the obligations of a PM under the MSA are subject to Title 11 of the United States Code (the “Bankruptcy Code”) and to other applicable insolvency or similar laws. If one or more PMs were to become a debtor in a case under the Bankruptcy Code, there could be delays or reductions in or elimination of payments under the MSA by the PMs in bankruptcy, and the Tobacco Settlement Revenues received by the Agency could be delayed, reduced, or eliminated.

In the event of the bankruptcy of a PM, unless approval of the bankruptcy court is obtained, the automatic stay provisions of the Bankruptcy Code could prevent any action by the State, the Agency, the Indenture Trustee or the holders or the beneficial owners of the Series 2020 Bonds to collect any tobacco settlement payments or any other amounts owing by the bankrupt PM. In addition, even if the bankrupt PM wanted to continue paying the tobacco settlement payments, it could be prohibited as a matter of law from making such payments. In particular, if it were to be determined that the MSA was not an “executory contract” under the Bankruptcy Code, then the PM may be unable to make further payments of tobacco settlement payments. If the MSA is determined in a bankruptcy case to be an “executory contract” under the Bankruptcy Code, the bankrupt PM could seek court approval to reject the MSA and stop making payments under it. No assurance can be given as to whether a court will find that the MSA is or is not an executory contract.

Furthermore, payments previously made to the holders or beneficial owners of the Series 2020 Bonds within a certain period prior to the bankruptcy of a PM could be avoided as preferential payments, so that such holders or

241 beneficial owners would be required to return such payments to the bankrupt PM. Also, the bankrupt PM may have the power to alter the terms of its payment obligations under the MSA without the consent, and even over the objection of the State, the Agency, the Indenture Trustee or the holders and beneficial owners of the Series 2020 Bonds. Finally, while there are provisions of the MSA purporting to deal with the situation when a PM goes into bankruptcy (including provisions regarding the termination of that PM’s obligations) (see “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Termination of MSA”), such provisions may be unenforceable. NAAG has stated that it actively monitors any bankruptcy related activity of the PMs with the goals of preventing the debtors from using bankruptcy law to avoid their MSA payment obligations to the Settling States and ensuring that Settling States can continue to perform their regulatory duties despite the bankruptcy filing, but there can be no assurance that the actions of NAAG will be successful. There may be other possible effects of a bankruptcy of a PM that could result in delays and/or reductions in, or elimination of, tobacco settlement payments under the MSA. Regardless of any specific adverse determination in a PM bankruptcy proceeding, the fact of a PM bankruptcy proceeding could materially adversely affect the liquidity and value of the Series 2020 Bonds and could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

Failures by PMs to Make Payments Under the MSA Could be Coupled with an Inability on the Part of the Settling States to Enforce and Collect Defaulted Payments

A PM could discontinue making required payments under the MSA for any reason. Any attempts to enforce payments under the MSA from a PM in breach could be costly and time consuming as well as likely to include litigation. For example, Vibo Corporation, Inc., d/b/a General Tobacco (“General Tobacco”) ceased production of cigarettes in 2010 and has defaulted upon certain of its MSA payments. General Tobacco has stated that it will be unable to make any back payments it owes under the MSA. Two Settling States brought suit on behalf of all of the Settling States seeking full payment by General Tobacco of its MSA obligations. The ability of the Settling States to enforce and collect such payments in instances such as this is limited by the ability of the defaulting PM to meet its obligations and may be costly. Failure by other PMs to make payments could be coupled with an inability on the part of the Settling States to enforce and collect defaulted payments under the MSA, which could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

Potential Payment Adjustments for Population Changes Under the MOU and the ARIMOU

The MOU provides that the amount of tobacco settlement payments payable to Participating Jurisdictions that are counties are subject to adjustments for population changes. The amount of the tobacco settlement payments distributed to Participating Jurisdictions that are counties, including the County, pursuant to the MOU and the ARIMOU is allocated based on the proportion of each county’s population to the total State population, calculated using the then most current Official United States Decennial Census figures, which are currently updated every ten years. Based on the 2010 Official United States Decennial Census, approximately 0.935% of the residents of the State resided in the County. Pursuant to the MOU and the ARIMOU, the County is therefore entitled to an equivalent percentage of the 45% share of the tobacco settlement payments allocable to the Participating Jurisdictions that are counties. There can be no assurance that future Official United States Decennial Census reports will not conclude that the County represents a smaller relative percentage of the overall population of the State than in 2010, or that the tobacco settlement payments payable to the County will not decline. Subsequent adjustments are expected to occur at subsequent ten-year intervals following each Official United States Decennial Census, and there can be no assurance that the percentage of tobacco settlement payments payable to the County will not materially decline following such adjustments. In addition, there can be no assurance that the frequency of such Official United States Decennial Census reports will not change, or that the methodology utilized by the United States in performing the Official United States Decennial Census will not change, or that any such change in methodology would not result in a determination that the County represents a smaller relative percentage of the overall State population than reported in any prior Official United States Decennial Census.

242 Series 2020 Bonds Secured Solely by the Collateral

The Series 2020 Bonds are limited obligations of the Agency, payable from and secured solely by the Collateral pledged under the Indenture. The Owners have no recourse to other assets of the Agency, including, but not limited to, any assets pledged to secure payment of any other debt obligation of the Agency. If, notwithstanding the limitation on recourse described in the preceding sentence, any Owners are deemed to have an interest in any asset of the Agency pledged to the payment of other debt obligations of the Agency, the Owners’ interest in such asset shall be subordinate to the claims and rights of the holders of such other debt obligations, and the Indenture will constitute a subordination agreement for purposes of Section 510(a) of the U.S. Bankruptcy Code. The Series 2020 Bonds are not secured by the proceeds thereof, with the exception of the proceeds deposited in the Senior Liquidity Reserve Account or the Subordinate Liquidity Reserve Account, as applicable.

The Series 2020 Bonds do not constitute a charge against the general credit of the Agency or any of its Members, including the County, and under no circumstances shall the Agency or any Member, including the County, be obligated to pay the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds, except from the Collateral pledged therefor under the Indenture. The Agency has no taxing power. Neither the credit of the State, nor of any public agency of the State (other than the Agency), nor of any Member of the Agency, including the County, is pledged to the payment of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds. The Series 2020 Bonds do not constitute a debt, liability or obligation of the State or any public agency of the State (other than the Agency) or any Member of the Agency, including the County. The County is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof. The Series 2020 Bonds do not constitute a debt, liability or obligation of the Corporation, and the Corporation is under no obligation to make payments of the principal or Accreted Value of, or redemption premium, if any, or interest on, the Series 2020 Bonds in the event that Collections are insufficient for the payment thereof.

Uncertainty as to Timing of Turbo Redemptions of the Series 2020B Subordinate Bonds

No assurance can be given as to the timing of Turbo Redemptions of the Series 2020B Subordinate Bonds. A certain level of payments due under the MSA has been forecast based on various assumptions, including, among others, levels of domestic cigarette consumption as set forth in the Tobacco Consumption Report, County population levels as set forth in the Population Forecast available from the Department of Finance, and an assumption that there will not be an NPM Adjustment. These assumptions, which were used to provide expectations of Turbo Redemptions of the Series 2020B Subordinate Bonds from Turbo Available Collections, are discussed in “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.” No assurance can be given that these assumptions will be realized. Actual results could and likely will vary from such assumptions. Such variance could be material. Any material reduction in Tobacco Settlement Revenues or earnings on the Pledged Accounts would impair the Turbo Available Collections available to make Turbo Redemptions of the Series 2020B Subordinate Bonds and extend the average lives of the Series 2020B Subordinate Bonds. Owners of the Series 2020B Subordinate Bonds bear the reinvestment risk from faster than expected amortization as well as the extension risk from slower than expected amortization. Turbo Redemptions on the Series 2020B-1 Subordinate Bonds are not rated by S&P. The Series 2020B-2 Subordinate Bonds are not rated by S&P.

Limited Remedies

The Indenture Trustee is limited under the terms of the Loan Agreement and the Sale Agreement to enforcing the terms of such agreements and to receiving the Tobacco Settlement Revenues and applying them in accordance with the Indenture. The Indenture Trustee cannot sell or foreclose on the County Tobacco Assets or its rights under the Loan Agreement or the Sale Agreement. The County, the Corporation and the Agency have not made any representation or warranty that the MSA is enforceable. The MOU provides by its terms that the distribution of tobacco-related recoveries is not subject to alteration by legislative, judicial or executive action at any level, and the County has made representations as to the enforceability of the MOU and the ARIMOU. However, such agreements cannot be enforced directly by the Corporation, the Agency or the Indenture Trustee. In accordance with the Sale Agreement, the County has agreed not to take any action or omit to take any action and has agreed to use its reasonable efforts not to permit any action to be taken by others that would release any Person from any of such Person’s

243 covenants or obligations under the MSA, the MOU or the ARIMOU, or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, the MSA, the MOU or the ARIMOU, nor, without the prior written consent of the Corporation or its assignee, amend, modify, terminate, waive or surrender, or agree to any amendment, modification, termination, waiver or surrender of, the terms of the MSA, the MOU or the ARIMOU, or waive timely performance or observance under such documents, in each case if the effect thereof would be materially adverse to the Bondholders. Remedies under the Loan Agreement and the Sale Agreement do not include the repurchase by the County of the County Tobacco Assets under any circumstances, including unenforceability of the MSA or breach of any representation or warranty. There is no direct right of enforcement by anyone other than the State against the PMs as obligors to make the tobacco settlement payments needed to make payments with respect to the Series 2020 Bonds.

Limited Liquidity of the Series 2020 Bonds; Price Volatility

There is currently a limited secondary market for securities such as the Series 2020 Bonds. The Underwriter is under no obligation to make a secondary market for the Series 2020 Bonds. There can be no assurance that a secondary market for the Series 2020 Bonds will develop, or if a secondary market does develop, that it will provide holders of the Series 2020 Bonds with liquidity or that it will continue for the life of the Series 2020 Bonds. Tobacco settlement revenue bonds generally have also exhibited greater price volatility than traditional municipal bonds. Any purchaser of the Series 2020 Bonds must be prepared to hold such securities for an indefinite period of time or until redemption or final payment of such securities.

Limited Nature of Ratings; Reduction, Suspension or Withdrawal of a Rating

In recent years, rating agencies have revised their assumptions regarding their ratings of unenhanced tobacco settlement bonds on account of the continuing decline in MSA payments resulting from cigarette volume decline, withholdings by PMs of MSA payments, and disputes and settlements relating to MSA payments. One rating agency (Fitch Ratings) withdrew in June 2016 its outstanding structured finance ratings on all of its rated U.S. tobacco asset- backed securities. In its May 2016 announcement of its intention to withdraw the ratings, Fitch Ratings said the primary reason for the withdrawal was that individual, custom modifications (by several participants) to material calculations originally part of the MSA eroded Fitch Ratings’ confidence that ratings “can be consistently maintained, as insufficient information exists to predict the likelihood and effect of future modifications or that insufficient information will exist to support new, material variables included in them.”

S&P Global Ratings (“S&P”), the sole rating agency providing ratings for the rated Series 2020 Bonds, has periodically revised its assumptions for all tobacco settlement securitizations and placed on downgrade watch or lowered its ratings on various tobacco settlement securitizations. Most recently, in October 2019 S&P downgraded various tobacco settlement securitizations following its May 2019 and January 2019 announcements of a ratings downgrade watch as a result of NAAG’s publication of data indicating an accelerating decline in domestic cigarette shipment volume and a ratings downgrade of Altria, respectively. There is no assurance that S&P will not change its assessment of unenhanced tobacco settlement bonds as a class of securities in a way that would result in a reduction, suspension or withdrawal of the ratings of the rated Series 2020 Bonds.

The ratings assigned to the Series 2020A Senior Bonds and Series 2020B-1 Subordinate Bonds by S&P will reflect S&P’s assessment of the likelihood of the payment of interest on such Bonds, when due, and the payment of principal of such Bonds by their Maturity Dates and, with respect to the Series 2020A Senior Bonds that are Term Bonds, Sinking Fund Installment dates. The ratings do not address the payment of Turbo Redemptions on the Series 2020B-1 Subordinate Bonds. The Series 2020B-2 Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors. See “RISK FACTORS—Market for Series 2020B-2 Subordinate Bonds; No Credit Rating on Series 2020B-2 Subordinate Bonds.” The ratings of the Series 2020A Senior Bonds and Series 2020B-1 Subordinate Bonds will not be a recommendation to purchase, hold or sell such Bonds and such ratings will not address the marketability of such Bonds, any market price or suitability for a particular investor. There is no assurance that any rating will remain for any given period of time or that any rating will not be lowered, suspended or withdrawn entirely by S&P if, in S&P’s judgment, circumstances so warrant based on factors prevailing at the time. Any such reduction, suspension or withdrawal of a rating, if it were to occur, could adversely affect the availability of a market for, or the market prices of, the rated Series 2020 Bonds. See “RATINGS” herein.

244 Market for Series 2020B-2 Subordinate Bonds; No Credit Rating on Series 2020B-2 Subordinate Bonds

The Series 2020B-2 Subordinate Bonds are not rated. There may be a limited secondary market for the Series 2020B-2 Subordinate Bonds because the absence of any rating could adversely affect the ability of holders of such Bonds to sell such Bonds or the price at which such Bonds can be sold.

LEGAL CONSIDERATIONS

The following discussion summarizes some, but not all, of the possible legal issues that could adversely affect the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full, and could have an adverse effect on the liquidity and/or market value of the Series 2020 Bonds. The discussion does not address every possible legal challenge that could result in a decision that would cause the Tobacco Settlement Revenues to be reduced or eliminated. Any reference in the discussion to an opinion is an incomplete summary of such opinion and is qualified in its entirety by reference to the actual opinion.

Bankruptcy of a PM

The enforceability of the rights and remedies of the Agency, the Indenture Trustee and the holders of the Series 2020 Bonds and of the obligations of a PM under the MSA are subject to the Bankruptcy Code and to other applicable insolvency or similar laws. See “RISK FACTORS—Bankruptcy of a PM May Delay, Reduce or Eliminate Payments Under the MSA” for a description of risks arising from the bankruptcy of a PM, including, without limitation, the automatic stay provisions of the Bankruptcy Code, “executory contracts,” preferential payments, alteration of the terms of payment obligations, and other factors.

Recharacterization of Transfer of County Tobacco Assets Could Void Transfer

As a matter of California law, the County does not have the authority to borrow money secured by the County Tobacco Assets. Thus, if the transfer from the County to the Corporation is not a sale of the County Tobacco Assets, but is instead a borrowing by the County secured by the County Tobacco Assets, the transfer of the County Tobacco Assets to the Corporation may be void. The County and the Corporation have taken steps to structure the transfer of the County Tobacco Assets to the Corporation as an absolute sale and not as the grant of a security interest in the County Tobacco Assets to secure a borrowing by the County. Nonetheless, no assurance can be given that a court would not find that the transfer of the County Tobacco Assets to the Corporation is a secured borrowing. Because neither the Corporation nor the Agency has any other funds with which to make payments on the Series 2020 Bonds, if there were such a finding, the Owners could suffer a loss of their entire investment.

Effect of Bankruptcy of the County on County Tobacco Assets

Because the County is a governmental entity, it cannot be the subject of an involuntary bankruptcy case under the Bankruptcy Code. It can become a debtor only in a voluntary case.

The County and the Corporation have taken steps to structure the transfer of the County Tobacco Assets to the Corporation as an absolute sale and not as the grant of a security interest in the County Tobacco Assets to secure a borrowing by the County. If the County were to become a debtor in a bankruptcy case, and a party in interest (including the County itself) were to take the position that the transfer of the County Tobacco Assets to the Corporation should be recharacterized as the grant of a security interest in the County Tobacco Assets, then delays in payments on the Series 2020 Bonds could result. If a court were to adopt such position, then delays, reductions or elimination of payments on, or other losses with respect to, the Series 2020 Bonds could result. Losses suffered by Owners could be even more severe because, under California state law, the County does not have the authority to borrow money secured by the County Tobacco Assets, and thus, if the transfer from the County to the Corporation is recharacterized as a borrowing, the transfer of the County Tobacco Assets to the Corporation may be void. Because neither the Corporation nor the Agency has any other funds with which to make payments on the Series 2020 Bonds, the Owners and the beneficial owners of the Bonds could suffer a loss of their entire investment in such circumstances.

245 The County, the Corporation, and the Agency have taken steps to minimize the risk that in the event the County were to become the debtor in a bankruptcy case, a court would order that the assets and liabilities of the Corporation or the Agency be substantively consolidated with those of the County. The Corporation is a separate not- for-profit corporation, the organizational documents of which provide that it shall not commence a voluntary bankruptcy case without the unanimous affirmative vote of all of its directors, although this restriction may not be enforceable. The Agency is a separate, special purpose joint powers authority, the organizational documents of which provide that it shall not commence a voluntary bankruptcy case without the unanimous affirmative vote of all of its directors, although this restriction may not be enforceable. If a party in interest (including the County itself) were to take the position that the assets and liabilities of the Corporation or the Agency should be substantively consolidated with those of the County, delays in payments on the Series 2020 Bonds could result. If a court were to adopt such position, then delays, reductions or elimination of payments on, or other losses with respect to, the Series 2020 Bonds could result.

Actions could be taken in a bankruptcy of the County which would adversely affect the exclusion of interest on the Series 2020 Bonds from gross income for federal income tax purposes. There may be other possible effects of the bankruptcy of the County that could result in delays, reductions or elimination of payments on, or other losses with respect to, the Series 2020 Bonds. Regardless of any specific adverse determinations in a County bankruptcy proceeding, the fact of a County bankruptcy proceeding could have an adverse effect on the liquidity and value of the Series 2020 Bonds.

MSA and Qualifying Statute Enforceability

Certain parties have filed lawsuits against some, and in certain cases all, of the signatories to the MSA, alleging, among other things, that the MSA, Qualifying Statutes and Complementary Legislation violate and are void or unenforceable under certain provisions of law. See “RISK FACTORS—If Litigation Challenging the MSA, the Qualifying Statutes and Related Legislation Were Successful, Payments Under the MSA Might be Suspended or Terminated.”

No assurance can be given that a particular court would not hold that the MSA is not valid or enforceable, or that the State’s Qualifying Statute is not valid, enforceable, or constitutional, thus resulting in delays and/or reductions in, or elimination of, payments on the Series 2020 Bonds.

The MSA provides that it can be amended only with the consent of the parties affected by the amendment. No assurance can be given that the NPM Adjustment Settlement does not constitute an amendment of the MSA or that the NPM Adjustment Settlement does not have an effect on parties that are not signatories to the NPM Adjustment Settlement. If it were to be determined that the NPM Adjustment Settlement does have an effect on parties that are not signatories, then all or part of the NPM Adjustment Settlement may be unenforceable, which could have a material adverse effect on the Agency and its ability to pay debt service on the Series 2020 Bonds.

See “RISK FACTORS—Payment Decreases Under the Terms of the MSA—NPM Adjustment” and “RISK FACTORS—Other Risks Relating to the MSA and Related Statutes—Amendment to the State’s Qualifying Statute.”

Limitations on Certain Opinions of Counsel

A court’s decision regarding the matters upon which a lawyer is opining would be based on such court’s own analysis and interpretation of the factual evidence before it and of applicable legal principles. Thus, if a court reached a result different from that expressed in an opinion, it would not necessarily constitute reversible error or be inconsistent with that opinion. An opinion of counsel is not a prediction of what a particular court (including any appellate court) that reached the issue on the merits would hold, but, instead, is the opinion of such counsel as to the proper result to be reached by a court applying existing legal rules to the facts as properly found after appropriate briefing and argument and, in addition, is not a guarantee, warranty or representation, but rather reflects the informed professional judgment of such counsel as to specific questions of law. Opinions of counsel are not binding on any court or party to a court proceeding. The descriptions of the opinions set forth herein are summaries, do not purport to be complete and are qualified in their entirety by the opinions themselves.

246 Enforcement of Rights to Tobacco Settlement Revenues

It is possible that the State could in the future attempt to claim some or all of the Tobacco Settlement Revenues for itself, or otherwise interfere with the security for the Series 2020 Bonds. In that event, the Owners, the Indenture Trustee, the Agency, the Corporation, or the County may assert claims based on contractual, fiduciary, or constitutional rights, but no prediction can be made as to the disposition of such claims.

Contractual Remedies

Under California law, settlements are treated as contracts and may be enforced according to their terms. The MOU is a court-approved settlement that establishes the County’s right to receive its share of the tobacco settlement payments and to bring suit against the State to enforce such right. The Sale Agreement obligates the County to take all actions necessary to preserve, maintain and protect the title of the Corporation to the County Tobacco Assets. Thus, if the State violates the provisions of the MOU so as to impair the County’s right to the County Tobacco Assets, the Indenture Trustee, as assignee of the Corporation’s rights under the Sale Agreement, could seek to compel the County to enforce its payment rights under the MOU. Such enforcement costs will be paid from the Operating Account. As interested parties, the Corporation on its own behalf and the Indenture Trustee on behalf of the Owners could also seek to enforce the County’s rights under the MOU, although, since they are not parties to the MOU they may not have enforceable rights to do so.

Fiduciary Relationship Remedies

As the lead California plaintiff in the class action lawsuit underlying the MOU, the State stands in a relationship of faith and trust with the other class members, including the County. Among other fiduciary obligations, the State as lead plaintiff bears a duty to protect faithfully the settlement interests of the other class members. Consequently, action by the State, either unilaterally or by agreement with the OPMs, to amend the MOU, or otherwise impair the County’s rights to the County Tobacco Assets without its consent, may constitute a breach of the State’s fiduciary duties, but it is likely that the State would deny such a breach, and no prediction can be made as to the outcome of such a claim.

Constitutional Claims

The Owners are entitled to the benefit of the prohibitions in the United States Constitution’s Contract Clause against any state’s impairment of the obligation of contracts. The State has entered into the MOU and the ARIMOU allocating the State’s share of the benefits of the MSA among itself and Participating Jurisdictions, including the County. The Tobacco Settlement Revenues and money derived therefrom are the principal source of payment for the Series 2020 Bonds.

Based on the U.S. Supreme Court’s standard of review for Contract Clause challenges in Energy Reserves Group, Inc. v. Kansas Power & Light Co., the State must justify the exercise of its inherent police power to safeguard the vital interests of its people before the State may alter the MSA, the MOU or the financing arrangements in a manner that would substantially impair the rights of the Owners to be paid from the Tobacco Settlement Revenues. However, to justify the enactment by the State of legislation that substantially impairs the contractual rights of the Owners to be paid from the Collateral, the State must demonstrate a significant and legitimate public purpose, such as the remedying of a broad and general social or economic problem. In the event that the State demonstrates a significant and legitimate public purpose for such legislation, the State must also show that the impairment of the Owners’ rights is based upon reasonable conditions and are of a character appropriate to the public purpose justifying the legislation’s adoption.

Finally, the Owners may also have constitutional claims under the Due Process Clauses of the United States and State Constitutions.

247 No Assurance As to the Outcome of Litigation or Arbitration Proceedings

With respect to all matters of litigation or arbitration proceedings mentioned herein that have been brought and may in the future be brought against the PMs, or involving the enforceability or constitutionality of the MSA, the NPM Adjustment Settlement and NPM Adjustment Settlement Stipulated Partial Settlement and Award, and/or the State’s related legislation, Qualifying Statute or the enforcement of the right to the Tobacco Settlement Revenues or otherwise filed in connection with the domestic tobacco industry, the outcome of such litigation or arbitration proceedings, in general, cannot be predicted with certainty and depends, among other things, on (i) the issues being appropriately presented and argued before the courts (including the applicable appellate courts) and arbitration panels and (ii) the courts or panels, having been presented with such issues, correctly applying applicable legal principles in reaching appropriate decisions regarding the merits. In addition, courts and panels may, in their exercise of equitable jurisdiction, reach judgments based not upon the legal merits but upon a balancing of the equities among the parties. Accordingly, no assurance can be given as to the outcome of any such litigation or arbitration and any such adverse outcome could materially adversely affect the amount and/or timing of the Tobacco Settlement Revenues and the ability of the Agency to pay debt service on all or a portion of the Series 2020 Bonds on a timely basis or in full.

SUMMARY OF THE MASTER SETTLEMENT AGREEMENT

The following is a brief summary of certain provisions of the MSA and related information. This summary is not complete and is subject to, and qualified in its entirety by reference to, the MSA as amended. A copy of the MSA in its original form is attached hereto as APPENDIX B. Several amendments have been made to the MSA which are not included in APPENDIX B. Except for those amendments pursuant to which certain tobacco companies became SPMs, such amendments involve technical and administrative provisions not material to the summary below. In addition, the following includes a brief summary of certain provisions of the NPM Adjustment Settlement. See “RISK FACTORS” and “LEGAL CONSIDERATIONS” herein for a discussion of certain risks related to the MSA and the NPM Adjustment Settlement. See also APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,”— “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” and — “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the NPM Adjustment Settlement Agreement and related extension settlements.

General

The MSA is an industry-wide settlement of litigation between the Settling States (including the State) and the four original OPMs that was entered into between the attorneys general of the Settling States and the original OPMs on November 23, 1998. The MSA provides for other tobacco companies (the “SPMs”) to become parties to the MSA. The OPMs together with the SPMs are referred to as the “PMs.” The settlement represents the resolution of a large potential financial liability of the PMs for smoking-related injuries, the costs of which have been borne and will likely continue to be borne by states. Pursuant to the MSA, the Settling States agreed to settle all their past, present and future smoking-related claims against the PMs in exchange for agreements and undertakings by the PMs concerning a number of issues. These issues include, among others, making payments to the Settling States, abiding by more stringent advertising restrictions and funding educational programs, all in accordance with the terms and conditions set forth in the MSA. Distributors of PMs’ products are also covered by the settlement of such claims to the same extent as the PMs.

Parties to the MSA

The Settling States are all of the states, territories and the District of Columbia, except for the four states (Florida, Minnesota, Mississippi and Texas) that separately settled with the original OPMs prior to the adoption of the MSA (the “Previously Settled States”). According to NAAG, the following PMs are parties to the MSA (as of July 21, 2020, NAAG’s most recent reference date):

(Remainder of Page Intentionally Left Blank)

248 OPMs SPMs Philip Morris USA Inc. (formerly Bekenton, S.A. (1) LLC Philip Morris Incorporated) Canary Islands Cigar Co. Mac Baren Tobacco Company A/S R.J. Reynolds Tobacco Company Caribbean-American Tobacco Corp. Monte Paz (Compania Industrial de (formerly R.J. Reynolds Tobacco (CATCORP) Tabacos Monte Paz S.A.) Company, Brown & Williamson The Chancellor Tobacco Company, NASCO Products, LLC (4) Tobacco Corporation (2004 UK Ltd. OOO Tabaksfacrik Wolga merger) and Lorillard Tobacco Commonwealth Brands, Inc. (Russia) Company (2015 merger)) Daughters & Ryan, Inc. P.T. Djarum M/s. Dhanraj International (1) Pacific Stanford Manufacturing Eastern Company S.A.E. Corporation Ets L Lacroix Fils NV S.A. (Belgium) Peter Stokkebye Tobaksfabrik A/S Farmers Tobacco Company of Planta Tabak-manufaktur Gmbh & Co. Cynthiana, Inc. Poschl Tabak GmbH & Co. KG General Jack’s Incorporated Manufacturing Incorporated General Tobacco (Vibo Corporation Reemtsma Cigarettenfacbriken GmbH d/b/a General Tobacco) (2) (Reemtsma) House of A/S Santa Fe Natural Tobacco Company, Imperial Tobacco Limited/ITL (USA) Inc. Limited Scandinavian Tobacco Group Lane Ltd. Imperial Tobacco Limited/ITL (UK) (formerly Lane Limited and Imperial Tobacco Mullingar (Ireland) Tobacco Exporters International Imperial Tobacco Polska S.A. (USA) Ltd.) (Poland) Sherman’s 1400 Broadway N.Y.C., LLC Imperial Tobacco Production Ukraine (5) Imperial Tobacco Sigara ve Societe National d’Exploitation Tutunculuk Sanayi Ve Ticaret Industrielle des Tabacs et S.A. (Turkey) Allumettes (SEITA) International Tobacco Group (Las Tabacalera del Este, S.A. (TABESA) Vegas), Inc. Top Tobacco, LP ITG Brands, LLC (formerly known as U.S. Flue-Cured Tobacco Growers, Inc. Lignum-2, LLC) (3) Van Nelle Tabak Nederland B.V. International USA, Inc. (Netherlands) King Maker Marketing Vector Tobacco Inc. (formerly Vector Konci Group (USA) Inc. (formerly Tobacco Inc. and Medallion known as Konci G&D Company, Inc.) Management Group (USA) Inc.) Virginia Carolina Corporation, Inc. International Von Eicken Group Liberty Brands, LLC (1) Wind River Tobacco Company, LLC VIP Tobacco USA, LTD. (formerly Winner Sales Company) ZNF International, LLC

______(1) Has filed for bankruptcy relief. There may be other PMs that have filed for bankruptcy relief, of which the Agency is not aware. NAAG reports that other tobacco manufacturers that had been SPMs are no longer SPMs due to dissolution from bankruptcy or otherwise. (2) Ceased production of cigarettes and other tobacco products. (3) A subsidiary of Imperial Tobacco and an OPM with respect to those cigarette brands purchased from Reynolds Tobacco and Lorillard. (4) Acquired by 22nd Century Group, Inc. in August 2014, with 22nd Century Group, Inc. and its subsidiaries becoming signatories to an adherence agreement to the MSA, according to news reports. (5) Altria acquired Sherman Group Holdings, LLC and its subsidiaries in January 2017.

249 The MSA restricts PMs from transferring their tobacco product brands, cigarette product formulas and cigarette businesses (unless they are being transferred exclusively for use outside the United States) to any entity that is not a PM under the MSA, unless the transferee agrees to assume the obligations of the transferring PM under the MSA related to such brands, formulas or businesses. The MSA expressly provides that the payment obligations of each PM are not the obligation or responsibility of any affiliate of such PM or any other PM and, further, that the remedies, penalties and sanctions that may be imposed or assessed in connection with a breach or violation of the MSA will only apply to the PMs and not against any other person or entity. Obligations of the SPMs, to the extent that they differ from the obligations of the OPMs, are described below under “—Subsequent Participating Manufacturers.”

Scope of Release

Under the MSA, the PMs and the other “Released Parties” (defined below) are released from:

• claims based on past conduct, acts or omissions (including any future damages arising therefrom) in any way relating to the use, sale, distribution, manufacture, development, advertising, marketing or health effects of, or exposure to, or research statements or warnings regarding, tobacco products; and

• monetary claims based on future conduct, acts or omissions in any way relating to the use of or exposure to tobacco products manufactured in the ordinary course of business, including future claims for reimbursement of healthcare costs.

This release is binding upon each Settling State and any of its past, present and future agents, officials acting in their official capacities, legal representatives, agencies, departments, commissions and divisions. The MSA is further stated to be binding on the following persons, to the full extent of the power of the signatories to the MSA to release past, present and future claims on their behalf: (i) any Settling State’s subdivisions (political or otherwise, including, but not limited to, municipalities, counties, parishes, villages, unincorporated districts and hospital districts), public entities, public instrumentalities and public educational institutions; and (ii) persons or entities acting in a parens patriae, sovereign, quasi-sovereign, private attorney general, qui tam, taxpayer, or any other capacity, whether or not any of them participate in the MSA (a) to the extent that any such person or entity is seeking relief on behalf of or generally applicable to the general public in such Settling State or the people of such Settling State, as opposed solely to private or individual relief for separate and distinct injuries, or (b) to the extent that any such entity (as opposed to an individual) is seeking recovery of healthcare expenses (other than premium or capitation payments for the benefit of present or retired state employees) paid or reimbursed, directly or indirectly, by a Settling State. All such persons or entities are referred to collectively in the MSA as “Releasing Parties.”

To the extent that the attorney general of a Settling State does not have the power or authority to bind any of the Releasing Parties in such state, the release of claims contemplated by the MSA may be ineffective as to the Releasing Parties and any amounts that become payable by the PMs on account of their claims, whether by way of settlement, stipulated judgment or litigated judgment, will trigger the Litigating Releasing Parties Offset. See “— Adjustments to Payments.”

The release inures to the benefit of all PMs and their past, present and future affiliates, and the respective divisions, officers, directors, employees, representatives, insurers, lenders, underwriters, tobacco-related organizations, trade associations, suppliers, agents, auditors, advertising agencies, public relations entities, attorneys, retailers and distributors of any PM or any such affiliate (and the predecessors, heirs, executors, administrators, successors and assigns of each of the foregoing). They are referred to in the MSA individually as a “Released Party” and collectively as the “Released Parties.” However, the term “Released Parties” does not include any person or entity (including, but not limited to, an affiliate) that is an NPM at any time after the MSA execution date, unless such person or entity becomes a PM.

250 Overview of Payments by the Participating Manufacturers; MSA Escrow Agent

The MSA requires that the PMs make several types of payments, including Initial Payments, Annual Payments and Strategic Contribution Payments, as discussed below.* These payments (with the exception of the upfront Initial Payment) are subject to various adjustments and offsets, some of which could be material. See “— Adjustments to Payments” and “—Subsequent Participating Manufacturers” below. SPMs were not required to make Initial Payments. The OPMs have made all of the Initial Payments. Thus far, most of the PMs† have made the Annual Payments due in 2000 through, and including, 2020, and Strategic Contribution Payments due in 2008 through, and including, 2017, which was the last year in which such Strategic Contribution Payments were due (subject, in each case, to certain withholdings and payments into the DPA, including as described in “—NPM Adjustment Claims and NPM Adjustment Settlement”). See “—Payments Made to Date” below.

Payments required to be made by the OPMs are calculated annually based on actual domestic shipments of cigarettes in the prior calendar year by reference to the OPMs’ domestic shipment of cigarettes in 1997, with consideration under certain circumstances for the profitability of each OPM. Payments to be made by the SPMs are recalculated each year based on the Market Share of each individual SPM in relation to the Market Share of the OPMs. For SPMs that became signatories to the MSA within 90 days of its execution, payments are recalculated each year based on the Market Share less the Base Share of such SPM in relation to the Market Share of the OPMs. See “— Subsequent Participating Manufacturers” below. Pursuant to an escrow agreement (the “MSA Escrow Agreement”) established in conjunction with the MSA, Annual Payments are to be made to Citibank, N.A., as escrow agent (the “MSA Escrow Agent”), which in turn will disburse the funds to the parties entitled thereto.

Beginning with the payments due in the year 2000, PricewaterhouseCoopers LLP, the independent auditor under the MSA (the “MSA Auditor”) has, among other things, calculated and determined the amount of all payments owed pursuant to the MSA, the adjustments, reductions and offsets thereto (and all resulting carry-forwards, if any) and the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the PMs and among the Settling States. This information is not publicly available, and the MSA Auditor has agreed to maintain the confidentiality of all such information, except that the MSA Auditor may provide such information to PMs and the Settling States as set forth in the MSA.

Initial Payments

Initial Payments were made only by the OPMs. In December 1998, the OPMs collectively made an up-front Initial Payment of $2.40 billion. The 2000 Initial Payment, which had a scheduled base amount of approximately $2.47 billion, was paid in December 1999 in the approximate amount of $2.13 billion due to various adjustments. The 2001 Initial Payment, which had a scheduled base amount of approximately $2.55 billion, was paid in December 2000 in the approximate amount of $2.04 billion after taking into account various adjustments and an earlier overpayment. The 2002 Initial Payment, which had a scheduled base amount of approximately $2.62 billion, was paid in December 2001, in the approximate amount of $1.89 billion after taking into account various adjustments and a deposit made to the DPA. Approximately $204 million, which was substantially all of the money previously deposited in the DPA for payment to the Settling States, was distributed to the Settling States with the Annual Payment due April 15, 2002. The 2003 Initial Payment, which had a scheduled base amount of approximately $2.7 billion, was paid in December 2002 and January 2003, in the approximate amount of $2.14 billion after taking into account various adjustments. No Initial Payments were due after the 2003 Initial Payment.

* Other payments that are required to be made by the PMs, such as payments of attorneys’ fees and payments to a national foundation established pursuant to the MSA, are not allocated to the Settling States and are not available to the holders of the Bonds, and consequently are not discussed herein.

† Vibo Corporation, Inc., d/b/a General Tobacco, ceased production of cigarettes in 2010 and has defaulted upon certain of its MSA payments. General Tobacco has stated that it will be unable to make any back payments it owes under the MSA.

251 Annual Payments

The OPMs and the other PMs are required to make Annual Payments on each April 15 in perpetuity. Most of the PMs made the Annual Payments due April 15 in each of the years 2000 through 2020. The MSA sets forth the following table of scheduled base amounts of Annual Payments:

Base Amounts of Annual Payments(1) Payment Year Base Amount Payment Year Base Amount 2000 $4,500,000,000 2010 $8,139,000,000 2001 5,000,000,000 2011 8,139,000,000 2002 6,500,000,000 2012 8,139,000,000 2003 6,500,000,000 2013 8,139,000,000 2004 8,000,000,000 2014 8,139,000,000 2005 8,000,000,000 2015 8,139,000,000 2006 8,000,000,000 2016 8,139,000,000 2007 8,000,000,000 2017 8,139,000,000 2008 8,139,000,000 Thereafter 9,000,000,000 2009 8,139,000,000 ______(1) The Annual Payments from 2000 through 2020 have been made. Adjustments to Annual Payments for a given year may affect Annual Payments due in subsequent years. This table reflects base amounts of Annual Payments only, and does not reflect adjustments. Actual payments received have been substantially lower than the base amounts due to the application of adjustments. See “—Payments Made to Date” below.

The respective portion of each base amount applicable to each OPM is calculated by multiplying the base amount by the OPM’s Relative Market Share (defined below) during the preceding calendar year. The base annual payments in the above table will be increased by at least the minimum 3% Inflation Adjustment, adjusted by the Volume Adjustment, reduced by the Previously Settled States Reduction, and further adjusted by the other adjustments described below. Each SPM has Annual Payment obligations under the MSA (separate from the payment obligations of the OPMs) according to its market share. However, any SPM that became a party to the MSA within 90 days after it became effective pays only if its market share exceeds the higher of its 1998 market share or 125% of its 1997 market share (such higher share, the “Base Share”).

“Relative Market Share” is defined as an OPM’s percentage share of the number of cigarettes shipped by all OPMs in or to the 50 states, the District of Columbia and Puerto Rico (defined hereafter as the “United States”), as measured by the OPM’s reports of shipments to Management Science Associates, Inc. (“MSAI”) (or any successor acceptable to all the OPMs and a majority of the attorneys general of the Settling States who are also members of the NAAG executive committee). The term “cigarette” is defined in the MSA to mean any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, contains tobacco and is likely to be offered to, or purchased by, consumers as a cigarette and includes “roll-your-own” tobacco.

The base amounts shown in the table above are subject to the following adjustments applied in the following order:

• the Inflation Adjustment, • the Volume Adjustment, • the Previously Settled States Reduction, • the Non-Settling States Reduction, • the NPM Adjustment, • the Offset for Miscalculated or Disputed Payments, • the Litigating Releasing Parties Offset, and • the Offset for Claims-Over.

252 Application of these adjustments resulted in a material reduction of the Tobacco Settlement Revenues under the MSA from the scheduled base amounts for the years 2000 through 2020, as discussed below under the caption “— Payments Made to Date.”

Strategic Contribution Payments

The OPMs were required to make Strategic Contribution Payments on April 15 of each year from 2008 through 2017. Most of the PMs made the Strategic Contribution Payments due April 15 in each of the years 2008 through 2017. The base amount of each Strategic Contribution Payment was $861 million. The respective portion of the base amount applicable to each OPM was calculated by multiplying the base amount by the OPM’s Relative Market Share during the preceding calendar year. The SPMs were required to make Strategic Contribution Payments if their Market Share increased above their respective Base Shares. See “—Subsequent Participating Manufacturers” below.

The base amounts of the Strategic Contribution Payments were subject to the adjustments as described in “— Annual Payments” above, except for the Previously Settled States Reduction, which was not applicable to Strategic Contribution Payments. Application of the adjustments resulted in a material reduction of the Strategic Contribution Payments due to the State under the MSA from the scheduled base amount for the years 2000 through 2017, as discussed below under the caption “—Payments Made to Date.” No Strategic Contribution Payments are due after the 2017 Strategic Contribution Payment.

Adjustments to Payments

The base amounts of the Annual Payments are subject to certain adjustments to be applied sequentially and in accordance with formulas contained in the MSA.

Inflation Adjustment

The base amounts of the Annual Payments are increased each year to account for inflation. The increase in each year will be 3% or a percentage equal to the percentage increase in the Consumer Price Index (the “CPI”) (or such other similar measures as may be agreed to by the Settling States and the PMs) for the preceding year, whichever is greater (the “Inflation Adjustment”). The inflation adjustment percentages are compounded annually on a cumulative basis beginning in 1999 and were first applied in 2000.

Volume Adjustment

Each of the Annual Payments is increased or decreased by an adjustment which accounts for fluctuations in the number of cigarettes shipped by the OPMs in or to the United States (the “Volume Adjustment”).

If the aggregate number of cigarettes shipped in or to the United States by the OPMs in any given year (the “Actual Volume”) is greater than 475,656,000,000 cigarettes (the “Base Volume”), the base amount allocable to the OPMs is adjusted to equal the base amount (after application of the Inflation Adjustment) multiplied by a ratio, the numerator of which is the Actual Volume and the denominator of which is the Base Volume.

If the Actual Volume in a given year is less than the Base Volume, the base amount due from the OPMs (after application of the Inflation Adjustment) is decreased by 98% of the percentage by which the Actual Volume is less than the Base Volume, multiplied by such base amount. If, however, the aggregate operating income of the OPMs from sales of cigarettes in the United States during the year (the “Actual Operating Income”) is greater than $7,195,340,000, as adjusted for inflation in accordance with the Inflation Adjustment (the “Base Operating Income”), all or a portion of the volume reduction is added back (the “Income Adjustment”). The amount by which the Actual Operating Income of the OPMs exceeds the Base Operating Income is multiplied by the percentage of the allocable shares under the MSA represented by Settling States in which State-Specific Finality (as defined in the MSA) has been reached and divided by four, then added to the payment due. However, in no case will the amount added back due to the increase in operating income exceed the amount deducted due to the decrease in domestic volume.

253 Any add-back due to an increase in Actual Operating Income will be allocated among the OPMs on a Pro Rata basis in accordance with their respective increases in Actual Operating Income over 1997 Base Operating Income.

Certain PMs and Settling States were in dispute regarding whether the “roll-your-own” tobacco conversion for OPMs of 0.0325 ounces for one individual cigarette should continue to be used for purposes of calculating the downward Volume Adjustments to the MSA payments (as Settling States contended), or, rather, a 0.09 ounce conversion (as PMs contended). Forty-three jurisdictions entered into arbitration, and in an award dated January 21, 2013, the arbitration panel held that the MSA Auditor is to use the 0.0325 ounce conversion method for OPMs for purposes of roll-your-own tobacco. The State was not a party to this arbitration proceeding.

Previously Settled States Reduction

The base amounts of the Annual Payments (as adjusted by the Inflation Adjustment and the Volume Adjustment, if any) are subject to a reduction reflecting the four states that had settled with the OPMs prior to the adoption of the MSA (Mississippi, Florida, Texas and Minnesota) (the “Previously Settled States Reduction”). The Previously Settled States Reduction reduces by 12.4500000% each applicable payment on or before December 31, 2007, by 12.2373756% each applicable payment between January 1, 2008 and December 31, 2017, and by 11.0666667% each applicable payment on or after January 1, 2018. The SPMs are not entitled to any reduction pursuant to the Previously Settled States Reduction.

PSS Credit Amendment. Certain of the Settling States have executed documentation approving an amendment to the MSA that would allow SPMs to elect to receive a reduction in their MSA payments in an amount equal to a percentage (100% or a lesser percentage, depending on the SPM’s election and the number of years the amendment has been in effect) of the fees paid to Previously Settled States pursuant to state legislation in the Previously Settled States requiring tobacco product manufacturers that did not sign onto the Previously Settled State Settlements to pay a fee to such Previously Settled States (the “PSS Credit Amendment”). The PSS Credit Amendment would also provide for certain increases in the electing SPMs’ MSA payments. Three Previously Settled States impose a fee on tobacco product manufacturers that did not sign onto the applicable state’s Previously Settled State Settlement ($0.50 per pack of 20 cigarettes in Minnesota, $0.27, adjusted for inflation, per pack of 20 cigarettes in Mississippi, and $0.55 per pack of 20 cigarettes in Texas; see “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY—Regulatory Issues—Excise Taxes” for a discussion of litigation relating to the Texas fee). The PSS Credit Amendment is not currently in effect, because by its terms it will only take effect if and when all Settling States having aggregate Allocable Shares equal to at least 99.937049% (the equivalent of the aggregate Allocable Share of the 46 states that are Settling States), and all OPMs and Commonwealth Brands, Inc., have executed the PSS Credit Amendment. No assurance can be given as to if or when the PSS Credit Amendment will take effect. Further, no assurance can be given as to whether the PSS Credit Amendment, if and when it takes effect, will reduce the amount of Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds. See “RISK FACTORS—Other Risks Relating to the MSA and Related Statutes—Amendments, Waivers and Termination” and “—Reliance on State Enforcement of the MSA; State Impairment.” See also “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—NPM Adjustment Settlement.”

Non-Settling States Reduction

In the event that the MSA terminates as to any Settling State, the remaining Annual Payments, if any, due from the PMs shall be reduced to account for the absence of such state. This adjustment has no effect on the amounts to be collected by states which remain a party to the MSA, and the reduction is therefore not detailed.

Non-Participating Manufacturers Adjustment

The “NPM Adjustment” under the MSA is based upon market share increases, measured by domestic sales of cigarettes by NPMs, and operates to reduce the payments of the PMs under the MSA in the event that the PMs incur losses in market share to NPMs during a calendar year as a result of the MSA.

254 Under the MSA, three conditions must be met in order to trigger an NPM Adjustment: (1) the aggregate market share of the PMs in any year must fall more than 2% below the aggregate market share held by those same PMs in 1997, (2) a nationally recognized firm of economic consultants must determine that the disadvantages experienced as a result of the provisions of the MSA were a significant factor contributing to the market share loss for the year in question, and (3) the Settling States in question must be proven to not have diligently enforced their Model Statutes. Once a significant factor determination in favor of the PMs for a particular year has been made by an economic consulting firm, or the states’ agreement not to contest that the disadvantages of the MSA were a significant factor contributing to the PMs’ collective loss of market share in a particular year has become effective, a PM has the right under the MSA to pay the disputed amount of the NPM Adjustment for that year into the DPA or withhold it altogether. The NPM Adjustment, after conclusion of the applicable arbitration regarding diligent enforcement for the relevant sales year, is applied to the subsequent year’s Annual Payment and the decrease in total funds available as a result of the NPM Adjustment is then allocated on a Pro Rata basis among those Settling States that have been found (i) to not diligently enforce their Qualifying Statutes, or (ii) to have enacted the Model Statute or a Qualifying Statute that is declared invalid or unenforceable by a court of competent jurisdiction.

The 1997 market share percentage for the PMs, less 2%, is defined in the MSA as the “Base Aggregate Participating Manufacturer Market Share.” If the PMs’ actual aggregate market share is between 0% and 16 ⅔% less than the Base Aggregate Participating Manufacturer Market Share, the amounts paid by the PMs would be decreased by three times the percentage decrease in the PMs’ actual aggregate market share. If, however, the aggregate market share loss from the Base Aggregate Participating Manufacturer Market Share is greater than 16 ⅔%, the NPM Adjustment will be calculated as follows:

NPM Adjustment = 50% + [50% / (Base Aggregate Participating Manufacturer Market Share – 16⅔%)] x [market share loss – 16⅔%]

Regardless of how the NPM Adjustment is calculated, it is always subtracted from, and may not exceed, the total Annual Payments due from the PMs in any given year. The NPM Adjustment for any given year for a specific state cannot exceed the amount of Annual Payments due to such state. The NPM Adjustment does not apply at all if the number of cigarettes shipped in or to the United States in the year prior to the year in which the payment is due by all manufacturers that were PMs prior to December 7, 1998 exceeds the number of cigarettes shipped in or to the United States by all such PMs in 1997.

The NPM Adjustment is also state-specific in that a Settling State may avoid or mitigate the effects of an NPM Adjustment by enacting and diligently enforcing the Model Statute or a Qualifying Statute. Any Settling State that adopts and diligently enforces the Model Statute or a Qualifying Statute is exempt from the NPM Adjustment. The decrease in total funds available due to the NPM Adjustment is allocated on a Pro Rata basis among those Settling States that either (i) did not enact and diligently enforce the Model Statute or Qualifying Statute, or (ii) enacted the Model Statute or a Qualifying Statute that is declared invalid or unenforceable by a court of competent jurisdiction. The practical effect of a decision by a PM to claim an NPM Adjustment for a given year and pay its portion of the amount of such claimed NPM Adjustment into the DPA, or withhold payment of such amount, would be to reduce the payments to all Settling States on a pro rata basis until a resolution is reached regarding the diligent enforcement dispute for all Settling States for such year, or until a settlement is reached for some or all such disputes for such year (such as in the NPM Adjustment Settlement discussed below). If the PMs make a claim for an NPM Adjustment for any particular year and a state is determined to be one of a few states (or the only state) not to have diligently enforced its Model Statute or Qualifying Statute in such year, the amount of the NPM Adjustment applied to such state in the year following such determination could be as great as the amount of Annual Payments that could otherwise have been received by such state in such year.

If a Settling State enacts and diligently enforces a Qualifying Statute that is the Model Statute but it is declared invalid or unenforceable by a court of competent jurisdiction, the NPM Adjustment for any given year will not exceed 65% of the amount of such state’s allocated payment for the subsequent year. If a Qualifying Statute that is not the Model Statute is held invalid or unenforceable, however, such state is not entitled to any protection from the NPM Adjustment. Moreover, if a state adopts the Model Statute or a Qualifying Statute but then repeals it or amends it in such fashion that it is no longer a Qualifying Statute, then such state will no longer be entitled to any protection from

255 the NPM Adjustment. At all times, a state’s protection from the NPM Adjustment is conditioned upon the diligent enforcement of its Model Statute or Qualifying Statute, as the case may be. See “RISK FACTORS—Payment Decreases Under the Terms of the MSA” above and “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—MSA Provisions Relating to Model/Qualifying Statutes” below. See also “—Most Favored Nation Provisions.”

For a discussion of the terms of the NPM Adjustment Settlement, which the State joined and which settled claims related to the 2003 through 2022 NPM Adjustments and set forth a methodology for determining subsequent NPM Adjustments, and matters related thereto, see “—NPM Adjustment Claims and NPM Adjustment Settlement” below.

Offset for Miscalculated or Disputed Payments

If information becomes available to the MSA Auditor not later than four years after the scheduled due date of any payment due pursuant to the MSA showing an underpayment or overpayment by a PM, the MSA Auditor will recalculate the payment and make provisions for rectifying the error (the “Offset for Miscalculated or Disputed Payments”). There are no time limits specified for recalculations although the MSA Auditor is required to determine amounts promptly. Disputes as to determinations by the MSA Auditor may be submitted to binding arbitration governed by the Federal Arbitration Act. In the event that mispayments have been made, they will be corrected through payments with interest (in the event of underpayments) or withholdings with interest (in the event of overpayments). Interest will be at the prime rate published from time to time by The Wall Street Journal or, in the event The Wall Street Journal is no longer published or no longer publishes such rate, an equivalent successor reference rate determined by the MSA Auditor, except where a party fails to pay undisputed amounts or fails to provide necessary information readily available to it, in which case a penalty rate of the prime rate plus 3% applies. If a PM disputes any required payment, it must determine whether any portion of the payment is undisputed and pay that amount for disbursement to the Settling States. The disputed portion may be paid into the DPA pending resolution of the dispute, or may be withheld. Failure to pay such disputed amounts into the DPA will result in liability for interest at the penalty rate if the disputed amount was in fact properly due and owing. See “RISK FACTORS—Payment Decreases Under the Terms of the MSA.”

Litigating Releasing Parties Offset

If any Releasing Party initiates litigation against a PM for any of the claims released in the MSA, the PM may be entitled to an offset against such PM’s payment obligation under the MSA (the “Litigating Releasing Parties Offset”). A defendant PM may offset dollar-for-dollar any amount paid in settlement, stipulated judgment or litigated judgment against the amount to be collected by the applicable Settling State under the MSA only if the PM has taken all ordinary and reasonable measures to defend that action fully and only if any settlement or stipulated judgment was consented to by the state attorney general. The Litigating Releasing Parties Offset is state-specific. Any reduction in MSA payments as a result of the Litigating Releasing Parties Offset would apply only to the Settling State of the Releasing Party.

Offset for Claims-Over

If a Releasing Party pursues and collects on a released claim against an NPM or a retailer, supplier or distributor arising from the sale or distribution of tobacco products of any NPM or the supply of component parts of tobacco products to any NPM (collectively, the “Non-Released Parties”), and the Non-Released Party in turn successfully pursues a claim for contribution or indemnification against a Released Party (as defined herein), the Releasing Party must (i) reduce or credit against any judgment or settlement such Releasing Party obtains against the Non-Released Party the full amount of any judgment or settlement such Non-Released Party may obtain against the Released Party, and (ii) obtain from such Non-Released Party for the benefit of such Released Party a satisfaction in full of such Non-Released Party’s judgment or settlement against the Released Party. In the event that such reduction or satisfaction in full does not fully relieve any OPM (or any person or entity that is a Released Party by virtue of its relation to any OPM) of its duty to pay to the Non-Released Party, such OPM (or any person or entity that is a Released Party by virtue of its relation to any OPM) is entitled to a dollar-for-dollar offset from its payment to the applicable Settling State (the “Offset for Claims-Over”). For purposes of the Offset for Claims-Over, any person or entity that

256 is enumerated in the definition of Releasing Party set forth above is treated as a Releasing Party without regard to whether the applicable attorney general had the power to release claims of such person or entity. The Offset for Claims-Over is state-specific and would apply only to MSA payments owed to the Settling State of the Releasing Party.

Subsequent Participating Manufacturers

SPMs are obligated to make Annual Payments, which are made at the same times as the corresponding payments to be made by OPMs. Such payments for SPMs are calculated differently, however, from such payments for OPMs. Each SPM’s payment obligation is determined according to its market share if, and only if, its “Market Share” (defined in the MSA to mean a manufacturer’s share, expressed as a percentage, of the total number of cigarettes sold in the United States in a given year, as measured by excise taxes (or similar taxes, in the case of Puerto Rico)), for the year preceding the payment exceeds its Base Share. If an SPM executes the MSA after February 22, 1999 (i.e., 90 days after the effective date of the MSA), its Base Share, is deemed to be zero. Fourteen of the current 52 SPMs signed the MSA on or before the February 22, 1999 deadline, according to NAAG.

For each Annual Payment, each SPM is required to pay an amount equal to the base amount of the Annual Payment owed by the OPMs, collectively, adjusted for the Volume Adjustment described above but prior to any other adjustments, reductions or offsets, multiplied by (i) the difference between that SPM’s Market Share for the preceding year and its Base Share, divided by (ii) the aggregate Market Share of the OPMs for the preceding year. Other than the application of the Volume Adjustment, payments by the SPMs are also subject to the same adjustments (including the Inflation Adjustment), reductions and offsets as are the payments made by the OPMs, with the exception of the Previously Settled States Reduction.

Because the Annual Payments to be made by the SPMs are calculated in a manner different from the calculations for Annual Payments to be made by the OPMs, a change in market share between the OPMs and the SPMs could cause the amount of Annual Payments required to be made by the PMs in the aggregate to be greater or less than the amount that would be payable if their market share remained the same. In certain circumstances, an increase in the market share of the SPMs could increase the aggregate amount of Annual Payments because the Annual Payments to be made by the SPMs are not adjusted for the Previously Settled States Reduction. However, in other circumstances, an increase in the market share of the SPMs could decrease the aggregate amount of Annual Payments because the SPMs are not required to make any Annual Payments unless their market share increases above their Base Share, or because of the manner in which the Inflation Adjustment is applied to each SPM’s payments.

Certain PMs and Settling States were in dispute regarding whether the payment obligations of one SPM (Liggett Group LLC) should continue to be determined based on the “net” number of cigarettes on which federal excise tax is paid (as Settling States contended), or, rather, an “adjusted gross” number of cigarettes (as PMs contended). Forty-three jurisdictions entered into arbitration, and in an award dated January 21, 2013, the arbitration panel held that the MSA Auditor is to use the market share for Liggett Group LLC on a net basis, but increase that calculation by a specified factor to avoid unfairness given the gross basis used for Liggett Group LLC in the MSA Auditor’s March 30, 2000 calculation. The State was not a party to this arbitration proceeding.

Payments Made to Date

As required, the OPMs made all of the Initial Payments due in the years 1998 to 2003 (the last year such payments were due), and most PMs made the Strategic Contribution Payments due in the years 2008 to 2017 (the last year such payments were due). Most PMs have made Annual Payments each year since 2000, the first year that Annual Payments were due. The California Escrow Agent has disbursed to the Agency its allocable portions thereof and certain other amounts under the MSA, the MOU and the ARIMOU. Under the MSA, the computation of Annual Payments by the MSA Auditor is confidential and may not be used for purposes other than those stated in the MSA. The County’s and the Agency’s sole sources of information regarding the computation and amount of such payments are the reports and accountings furnished to them by the State.

257 The following table sets forth for each of the preceding 10 years the base amount of Annual Payments and Strategic Contribution Payments, as applicable, allocable to the County pursuant to the MSA, as modified by the MOU and the ARIMOU, and the amounts of Tobacco Settlement Revenues actually received by the Indenture Trustee in such year, as described below. The amounts actually received may reflect adjustments attributable to prior years’ payments.

Indenture Trustee’s [*Sold Portion of*] Actual Receipts of Base Payment Allocable Tobacco Settlement Year(1) to the County(2) Revenues(3) 2011 Annual Payment and Strategic Contribution Payment [*by *[TO COME calculation*] FROM COUNTY*] 2012 Annual Payment and Strategic Contribution Payment 2013 Annual Payment and Strategic Contribution Payment 2014 Annual Payment and Strategic Contribution Payment 2015 Annual Payment and Strategic Contribution Payment 2016 Annual Payment and Strategic Contribution Payment 2017 Annual Payment and Strategic Contribution Payment 2018 Annual Payment 2019 Annual Payment 2020 Annual Payment ______(1) Annual Payments are, and Strategic Contribution Payments were, due from the PMs on April 15 of the applicable calendar year (payment year) pursuant to the MSA. Actual receipts are listed as of June 30 (the end of the Agency’s fiscal year) of each year. (2) Rounded. The County’s allocable portion of base payments as represented in this table consists of the State’s 12.7639554% share of Annual Payments under the MSA, and the State’s 5.1730408% share of Strategic Contribution Payments under the MSA, in each case (x) multiplied by 45% (representing the portion of the State’s receipts of tobacco settlement payments under the MSA that are allocated to the State’s counties under the MOU and the ARIMOU), which result is then (y) multiplied by the quotient obtained by dividing the County’s population of 348,432 by the State’s population of 37,253,956, according to the 2010 Official United States Decennial Census (applicable to payment years 2011 through 2020). (3) Rounded. Reflects adjustments. Amounts are set forth to the best of the Agency’s knowledge. For fiscal years ending June 30, 2013 onward, reflects the NPM Adjustment Settlement (including a release from the DPA in 2013), as discussed herein. Any adjustment is reflected in the period in which it was actually made.

The terms of the MSA relating to such payments and various adjustments thereto are described above under the captions “—Annual Payments,” “—Strategic Contribution Payments” and “—Adjustments to Payments.” One or more of the PMs are disputing or have disputed the calculations of some of the Annual Payments for the years 2000 through 2020 and Strategic Contribution Payments for the years 2008 through 2017, as described further herein. In addition, subsequent revisions in the information delivered to the MSA Auditor (on which the MSA Auditor’s calculations of Annual Payments are based) have in the past and may in the future result in a recalculation of the payments shown above. Such revisions may also result in routine recalculation of future payments. No assurance can be given as to the magnitude of any such recalculation and such recalculation could trigger the Offset for Miscalculated or Disputed Payments.

Most Favored Nation Provisions

In the event that any non-foreign governmental entity other than the federal government should reach a settlement of released claims with PMs that provides more favorable terms to the governmental entity than does the MSA to the Settling States, the terms of the MSA will be modified to match those of the more favorable settlement. Only the non-economic terms may be considered for comparison.

258 In the event that any Settling State should reach a settlement of released claims with NPMs that provides more favorable terms to the NPMs than the MSA does to the PMs, or relieves in any respect the obligation of any PM to make payments under the MSA, the terms of the MSA will be deemed modified to match the NPM settlement or such payment terms, but only with respect to the particular Settling State. In no event will the adjustments discussed in this paragraph modify the MSA with regard to other Settling States. See “RISK FACTORS—Payment Decreases Under the Terms of the MSA.”

Disbursement of Funds from Escrow

The MSA Auditor makes all calculations necessary to determine the amounts to be paid by each PM, as well as the amounts to be disbursed to each of the Settling States. Not less than 40 days prior to the date on which any payment is due, the MSA Auditor must provide copies of the disbursement calculations to all parties to the MSA, who must within 30 days prior to the date on which such payment is due advise the other parties if it questions or challenges the calculations. The final calculation is due from the MSA Auditor not less than 15 days prior to the payment due date. The calculation is subject to further adjustments if previously missing information is received. In the event of a challenge to the calculations, the non-challenged part of a payment shall be processed in the normal course. Challenges will be submitted to binding arbitration. The information provided by the MSA Auditor to the State with respect to calculations of amounts to be paid by PMs is confidential under the terms of the MSA and may not be disclosed to the Agency or the Owners.

Disbursement of the funds by the MSA Escrow Agent from the escrow accounts shall occur within ten business days of receipt of the particular funds. The MSA Escrow Agent will disburse the funds due to, or as directed by, each Settling State in accordance with instructions received from that state.

Advertising and Marketing Restrictions; Educational Programs

The MSA prohibits the PMs from certain advertising, marketing and other activities that may promote the sale of cigarettes and smokeless tobacco products (“Tobacco Products”). Under the MSA, the PMs are generally prohibited from targeting persons under 18 years of age within the Settling States in the advertising, promotion or marketing of Tobacco Products and from taking any action to initiate, maintain or increase smoking by underage persons within the Settling States. Specifically, the PMs may not: (i) use any cartoon characters in advertising, promoting, packaging or labeling Tobacco Products; (ii) distribute any free samples of Tobacco Products except in a restricted facility where the operator thereof is able to ensure that no underage persons are present; or (iii) provide to any underage person any item in exchange for the purchase of Tobacco Products or for the furnishing of proofs-of-purchase coupons. The PMs are also prohibited from placing any new outdoor and transit advertising, and are committed to remove any existing outdoor and transit advertising for Tobacco Products in the Settling States. Other examples of prohibited activities include, subject to limited exceptions: (i) the sponsorship of any athletic, musical, artistic or other social or cultural event in exchange for the use of tobacco brand names as part of the event; (ii) the making of payments to anyone to use, display, make reference to or use as a prop any Tobacco Product or item bearing a tobacco brand name in any motion picture, television show, theatrical production, music performance, commercial film or video game; and (iii) the sale or distribution in the Settling States of any non-tobacco items containing tobacco brand names or selling messages.

In addition, the OPMs have agreed under the MSA to provide funding for the organization and operation of a charitable foundation (the “Foundation”) and educational programs to be operated within the Foundation. The purpose of the Foundation is to support programs to reduce the use of Tobacco Products by underage persons and to prevent diseases associated with the use of Tobacco Products. Each OPM may be required to pay its Relative Market Share of $300,000,000 on April 15 of each year on and after 2004 (as may be adjusted) in perpetuity if, during the year preceding the year when payment is due, the sum of the Market Shares of the OPMs equals or exceeds 99.05%.

Remedies Upon the Failure of a PM to Make a Payment

Each PM is obligated to pay when due the undisputed portions of the total amount calculated as due from it by the MSA Auditor’s final calculation. Failure to pay such portion shall render the PM liable for interest thereon from the date such payment is due to (but not including) the date paid at the prime rate published from time to time

259 by The Wall Street Journal or, in the event The Wall Street Journal is no longer published or no longer publishes such rate, an equivalent successor reference rate determined by the MSA Auditor, plus 3%. In addition, any Settling State may bring an action in court to enforce the terms of the MSA. Before initiating such proceeding, the Settling State is required to provide thirty (30) days’ written notice to the attorney general of each Settling State, to NAAG and to each PM of its intent to initiate proceedings.

Termination of MSA

The MSA is terminated as to a Settling State if (i) the MSA or consent decree in that jurisdiction is disapproved by a court and the time for an appeal has expired, the appeal is dismissed or the disapproval is affirmed, or (ii) the representations and warranties of the attorney general of that jurisdiction relating to the ability to release claims are breached or not effectively given. In addition, in the event that a PM enters bankruptcy and fails to perform its financial obligations under the MSA, the Settling States, by vote of at least 75% of the Settling States, both in terms of number and of entitlement to the proceeds of the MSA, may terminate certain financial obligations of that particular manufacturer under the MSA, although this provision may not be enforceable. See “RISK FACTORS—Bankruptcy of a PM May Delay, Reduce or Eliminate Payments Under the MSA.”

The MSA provides that if it is terminated, then the statute of limitations with respect to released claims will be tolled from the date the Settling State signed the MSA until the later of the time permitted by applicable law or one year from the date of termination and the parties will jointly move for the reinstatement of the claims and actions dismissed pursuant to the MSA. The parties will return to the positions they were in prior to the execution of the MSA.

Severability

By its terms, most of the major provisions of the MSA are not severable from its other terms. If a court materially modifies, renders unenforceable or finds unlawful any non-severable provision, the attorneys general of the Settling States and the OPMs are to attempt to negotiate substitute terms. If any OPM does not agree to the substitute terms, the MSA terminates in all Settling States affected by the court’s ruling.

Amendments and Waivers

The MSA may be amended by all of the PMs affected by the amendment and by all of the Settling States affected by the amendment. The terms of any amendment will not be enforceable against any PM or Settling State which is not a party to the amendment. Any waiver will be effective only against the parties to such waiver and only with respect to the breach specifically waived.

MSA Provisions Relating to Model/Qualifying Statutes

General

The MSA sets forth the schedule and calculation of payments to be made by OPMs to the Settling States. As described above, the Annual Payments are subject to, among other adjustments and reductions, the NPM Adjustment, which may reduce the amount of money that a Settling State receives pursuant to the MSA. The NPM Adjustment will reduce payments of a PM if such PM experiences certain losses of market share in the United States in a particular year as a result of participation in the MSA and any of the Settling States fail to prove that they have diligently enforced their Qualifying Statutes in such year.

Settling States may eliminate or mitigate the effect of the NPM Adjustment by taking certain actions, including the adoption and diligent enforcement of a statute, law, regulation or rule (a “Qualifying Statute” or “Escrow Statute”) which eliminates the cost disadvantages that PMs experience in relation to NPMs as a result of the provisions of the MSA. “Qualifying Statute,” as defined in Section IX(d)(2)(E) of the MSA, means a statute, regulation, law, and/or rule adopted by a Settling State that “effectively and fully neutralizes the cost disadvantages that PMs experience vis-à-vis NPMs within such Settling State as a result of the provisions of the MSA.” Exhibit T to the MSA sets forth a model form of Qualifying Statute (a “Model Statute”) that will qualify as a Qualifying Statute

260 so long as the statute is enacted without modification or addition (except for particularized state procedural or technical requirements) and is not enacted in conjunction with any other legislative or regulatory proposal. The State has enacted the Model Statute, which is a Qualifying Statute. The MSA also provides a procedure by which a Settling State may enact a statute that is not the Model Statute and receive a determination from a nationally recognized firm of economic consultants that such statute is a Qualifying Statute. See “RISK FACTORS—Payment Decreases under the Terms of the MSA” and “RISK FACTORS—If Litigation Challenging the MSA, the Qualifying Statutes and Related Legislation Were Successful, Payments under the MSA Might be Suspended or Terminated.”

If a Settling State continuously has a Qualifying Statute in full force and effect and diligently enforces the provisions of such statute, the MSA states that the payments allocated to such Settling State will not be subject to a reduction due to the NPM Adjustment. Furthermore, the MSA dictates that the aggregate amount of the NPM Adjustment is to be allocated, in a Pro Rata manner, among all Settling States that do not adopt and diligently enforce a Qualifying Statute. In addition, if the NPM Adjustment allocated to a particular Settling State exceeds its allocated payment that excess is to be reallocated equally among the remaining Settling States that have not adopted and diligently enforced a Qualifying Statute. Thus, Settling States that do not adopt and diligently enforce a Qualifying Statute will receive reduced allocated payments if an NPM Adjustment is in effect. The MSA provides an economic incentive for most states to adopt and diligently enforce a Qualifying Statute.

The MSA provides that if a Settling State enacts a Qualifying Statute that is the Model Statute and uses its best efforts to keep the Model Statute in effect, but a court invalidates the statute, then, although that state remains subject to the NPM Adjustment, the NPM Adjustment is limited to no more, on a yearly basis, than 65% of the amount of such state’s allocated payment (including reallocations described above). The determination from a nationally recognized firm of economic consultants that a statute constitutes a Qualifying Statute is subject to reconsideration in certain circumstances and such statute may later be deemed not to constitute a Qualifying Statute. In the event that a Qualifying Statute that is not the Model Statute is invalidated or declared unenforceable by a court, or, upon reconsideration by a nationally recognized firm of economic consultants, is determined not to be a Qualifying Statute, the Settling State that adopted such statute will become fully subject to the NPM Adjustment. Moreover, if a state adopts the Model Statute or a Qualifying Statute but then repeals it or amends it in such fashion that it is no longer a Qualifying Statute, then such state will no longer be entitled to any protection from the NPM Adjustment. At all times, a state’s protection from the NPM Adjustment is conditioned upon the diligent enforcement of its Model Statute or Qualifying Statute, as the case may be.

For a discussion of the NPM Adjustment Settlement, which the State joined, as well as the State’s amendment to its Qualifying Statute in furtherance thereof, see “—NPM Adjustment Claims and NPM Adjustment Settlement” below and “STATE LAWS RELATED TO THE MSA—California Qualifying Statute” herein, respectively.

Summary of the Model Statute

One of the objectives of the MSA (as set forth in the Findings and Purpose section of the Model Statute) is to shift the financial burdens of cigarette smoking from the Settling States to the tobacco product manufacturers. The Model Statute provides that any tobacco manufacturer who does not join the MSA would be subject to the provisions of the Model Statute because, as provided under the MSA,

[i]t would be contrary to the policy of the state if tobacco product manufacturers who determine not to enter into such a settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the state will have an eventual source of recovery from them if they are proven to have acted culpably. It is thus in the interest of the state to require that such manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such manufacturers from deriving large, short-term profits and then becoming judgment-proof before liability may arise.

Accordingly, pursuant to the Model Statute, a tobacco manufacturer that is an NPM under the MSA must deposit an amount for each cigarette that constitutes a “unit sold” into an escrow account (which amount increases on a yearly basis, as set forth in the Model Statute).

261 The amounts deposited into the escrow accounts by the NPMs may only be used in limited circumstances. Although the NPM receives the interest or other appreciation on such funds, the principal may only be released (i) to pay a judgment or settlement on any claim of the type that would have been released by the MSA brought against such NPM by the applicable Settling State or any Releasing Party located within such state; (ii) with respect to Settling States that have enacted and have in effect Allocable Share Release Amendments (described in the next paragraph), to the extent that the NPM establishes that the amount it was required to deposit into the escrow account was greater than the total payments that such NPM would have been required to make if it had been a PM under the MSA (as determined before certain adjustments or offsets) or, with respect to Settling States that do not have in effect such Allocable Share Release Amendments, to the extent that the NPM establishes that the amount it was required to deposit into the escrow account was greater than such state’s allocable share of the total payments that such NPM would have been required to make if it had been a PM under the MSA (as determined before certain adjustments or offsets); or (iii) 25 years after the date that the funds were placed into escrow (less any amounts paid out pursuant to (i) or (ii)).

The Model Statute, in its original form, required an NPM to make escrow deposits approximately in the amount that the NPM would have had to pay to all of the states had it been a PM and further authorized the NPM to obtain from the applicable Settling State the release of the amount by which the escrow deposit in that state exceeded that state’s allocable share of the total payments that the NPM would have made as a PM. In recent years legislation has been enacted in the State and all other Settling States, except Missouri,* to amend the Qualifying or Model Statutes in those states by eliminating the reference to the allocable share and limiting the possible release an NPM may obtain under the Model Statute to the excess above the total payment that the NPM would have paid for its cigarettes had it been a PM (each an “Allocable Share Release Amendment”). NAAG has endorsed these legislative efforts. A majority of the PMs, including all OPMs, have indicated their agreement in writing that in the event a Settling State enacts legislation substantially in the form of the model Allocable Share Release Amendment, such Settling State’s previously enacted Model Statute or Qualifying Statute will continue to constitute the Model Statute or a Qualifying Statute within the meaning of the MSA.

If the NPM fails to place funds into escrow as required by the applicable Qualifying Statute, the attorney general of the applicable Settling State may bring a civil action on behalf of the state against the NPM. If a court finds that an NPM violated the statute, it may impose civil penalties in the following amounts: (i) an amount not to exceed 5% of the amount improperly withheld from escrow per day of the violation and in an amount not to exceed 100% of the original amount improperly withheld from escrow; (ii) in the event of a knowing violation, an amount not to exceed 15% of the amount improperly withheld from escrow per day of the violation and in an amount not to exceed 300% of the original amount improperly withheld from escrow; and (iii) in the event of a second knowing violation, the court may prohibit the NPM from selling cigarettes to consumers within such state (whether directly or through a distributor, retailer or similar intermediary) for a period not to exceed two years.

NPMs include foreign tobacco manufacturers that intend to sell cigarettes in the United States that do not themselves engage in an activity in the United States but may not include the wholesalers of such cigarettes. NPMs also include Native American tobacco manufacturers that manufacture and sell, directly or through other Native American retailers, cigarettes to consumers from their or other Native American reservations and who assert their rights under various treaties and agreements with the United States and with states to manufacture and sell the cigarettes free of state and local taxes and, generally, free from the constraints and burdens of state and local laws. Enforcement of the Model Statute against any of such manufacturers may be difficult. See “STATE LAWS RELATED TO THE MSA.”

Complementary Legislation

Most of the Settling States (including the State) have passed legislation (often termed “Complementary Legislation”) to further ensure that NPMs are making escrow payments required by the states’ respective Qualifying

* The Missouri Attorney General reported February 8, 2016 that Missouri had negotiated with the PMs to resolve Missouri’s dispute with the PMs with respect to the NPM Adjustment for years 2003-2014, contingent upon the Missouri legislature adopting an Allocable Share Release Amendment. However, the Missouri legislature failed to adopt an Allocable Share Release Amendment by the April 15, 2016 deadline in the agreement negotiated by the Missouri Attorney General.

262 Statutes, as well as other legislation to assist in the regulation of tobacco sales. See “STATE LAWS RELATED TO THE MSA—California Complementary Legislation.”

All of the OPMs and other PMs have provided written assurances that the Settling States have no duty to enact Complementary Legislation, that the failure to enact such legislation will not be used in determining whether a Settling State has diligently enforced its Qualifying Statute pursuant to the terms of the MSA, and that diligent enforcement obligations under the MSA shall not apply to the Complementary Legislation. In addition, the written assurances contain an agreement that the Complementary Legislation will not constitute an amendment to a Settling State’s Qualifying Statute. However, a determination that a Settling State’s Complementary Legislation is invalid may make enforcement of its Qualifying Statute more difficult.

NPM Adjustment Claims and NPM Adjustment Settlement

Settlement of 1999 through 2002 NPM Adjustment Claims

In June 2003, the OPMs, certain SPMs and the Settling States settled all NPM Adjustment claims for the payment years 1999 through 2002, subject, however, under limited circumstances, to the reinstatement of a PM’s right to an NPM Adjustment for the payment years 2001 and 2002. In connection therewith, such PMs and the Settling States agreed prospectively that PMs claiming an NPM Adjustment for any year will not make a deposit into the DPA or withhold payment with respect thereto unless and until the selected economic consultants determine that the disadvantages of the MSA were a significant factor contributing to the Market Share loss giving rise to the alleged NPM Adjustment. If the selected economic consultants make such a “significant factor” determination regarding a year for which one or more PMs have claimed an NPM Adjustment, such PMs may, in fact, either make a deposit into the DPA or withhold payment reflecting the claimed NPM Adjustment.

NPM Adjustment Claims for 2003 Onward, Generally

According to NAAG, one or more of the PMs are disputing or have disputed the calculations of some Annual Payments and Strategic Contribution Payments, totaling over $15.3 billion, for the sales years 2003 through 2019 (payment years 2004 through 2020) as part of the NPM Adjustment. No provision of the MSA attempts to define what activities, if undertaken by a Settling State, would constitute diligent enforcement. Furthermore, the MSA does not explicitly state which party bears the burden of proving or disproving whether a Settling State has diligently enforced its Qualifying Statute, or whether any diligent enforcement dispute would be resolved in state courts or through arbitration. However, regarding the 2003 NPM Adjustment dispute, the State’s MSA court determined that the 2003 NPM Adjustment dispute was to be determined by a panel of arbitrators, and such panel of arbitrators determined that, when contested, a state bears the burden of proving its diligence. As discussed further below, the State had been a contested state in the 2003 NPM Adjustment dispute but then joined the NPM Adjustment Settlement, thereby settling its 2003 NPM Adjustment dispute, together with its 2004 to 2022 NPM Adjustment disputes. The NPM Adjustment Settlement also sets forth a methodology for determining subsequent years’ NPM Adjustments, as discussed below.

2003 NPM Adjustment Claims

An independent economic consulting firm, jointly selected by the MSA parties, determined that the disadvantages of the MSA were a significant factor contributing to the PMs’ collective loss of market share for 2003. Following the “significant factor” determination with respect to 2003, each of 38 Settling States filed a declaratory judgment action in state court seeking a declaration that such Settling State diligently enforced its Qualifying Statute during 2003. The OPMs and SPMs responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including motions to compel arbitration in 11 states and territories that did not file declaratory judgment actions. With one exception (Montana), the courts have ruled that the states’ claims of diligent enforcement are to be submitted to arbitration. The Montana Supreme Court ruled that Montana did not agree to arbitrate the question of whether it diligently enforced a Qualifying Statute and that diligent enforcement claims of that state must be litigated in state court, rather than in arbitration. Subsequently, in June 2012, Montana and the PMs reached an agreement whereby the PMs agreed not to contest Montana’s claim that it diligently enforced the Qualifying Statute during 2003 and therefore Montana would not be subject to the 2003 NPM Adjustment.

263 The MSA provides that arbitration, if required by the MSA, will be governed by the United States Federal Arbitration Act. The decision of an arbitration panel under the Federal Arbitration Act may only be overturned under limited circumstances, including a showing of a manifest disregard of the law by the panel.

The OPMs and approximately 25 other PMs entered into an agreement regarding arbitration with 45 states and territories concerning the 2003 NPM Adjustment. The agreement effectively provided for a partial liability reduction for the 2003 NPM Adjustment for states that entered into the agreement by January 30, 2009 and were determined in the arbitration not to have diligently enforced a Qualifying Statute during 2003. Based on the number of states that entered into the agreement by January 30, 2009 (45), the partial liability reduction for those states was 20%. This partial liability reduction was effectuated by the PMs jointly reimbursing such states 20% of their respective amounts of the NPM Adjustment. The selection of a three-judge panel arbitrating the 2003 NPM Adjustment claims (the “Arbitration Panel”) was completed in July 2010.

Following the completion of discovery, the PMs determined to continue to contest the 2003 diligent enforcement claims of 33 states (including the State), the District of Columbia and Puerto Rico and to no longer contest such claims by 12 other states and four U.S. territories (the “non-contested states”). Eighteen of these contested states (including the State), the District of Columbia and Puerto Rico, as well as two non-contested states, subsequently entered into the NPM Adjustment Settlement with the OPMs and certain of the SPMs as discussed below under “—NPM Adjustment Settlement,” leaving 15 states contested in the 2003 NPM Adjustment arbitration proceedings. A common issues hearing was held in April 2012, and state-specific evidentiary hearings began in May 2012 and were completed in May 2013. The decisions of the Arbitration Panel with regard to those 15 states and their enforcement in 2003 of their Qualifying Statutes are discussed below under “—2003 NPM Adjustment Arbitration Results and Disputes Concerning the NPM Adjustment Settlement Term Sheet and Stipulated Partial Settlement and Award.” Several of those 15 states subsequently joined the NPM Adjustment Settlement, as discussed below.

NPM Adjustment Settlement

On December 17, 2012, terms of a settlement were agreed to in the form of a term sheet (the “NPM Adjustment Settlement Term Sheet”) by 19 jurisdictions (including the State), the OPMs and certain SPMs regarding claims related to the 2003 through 2012 NPM Adjustments and the determination of subsequent NPM Adjustments. The 19 jurisdictions that signed the NPM Adjustment Settlement Term Sheet on December 17, 2012 were Alabama, Arizona, Arkansas, California, the District of Columbia, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Puerto Rico, Tennessee, Virginia, Virginia and Wyoming. In April 2013, Oklahoma joined the NPM Adjustment Settlement Term Sheet; in May 2013, Connecticut and South Carolina joined the NPM Adjustment Settlement Term Sheet; in June 2014, Kentucky and Indiana joined the NPM Adjustment Settlement Term Sheet (on modified terms); and in April 2017, Rhode Island and Oregon joined the NPM Adjustment Settlement Term Sheet. In October 2017, a final settlement agreement (the “NPM Adjustment Settlement Agreement”) became effective, incorporating the terms of, and superseding, the NPM Adjustment Settlement Term Sheet, and settling disputes related to the 2013 through 2015 NPM Adjustments. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, 10 additional jurisdictions (Alaska, Colorado, Delaware, Hawaii, Maine, North Dakota, Pennsylvania, South Dakota, Utah and Vermont) joined the NPM Adjustment Settlement Agreement in 2018, settling disputes related to the 2004-2017 NPM Adjustments. On various dates between June 14, 2018 and November 27, 2018, the initial 26 jurisdictions (including the State) that had joined the NPM Adjustment Settlement Agreement, and 39 tobacco manufacturers (including Philip Morris, Reynolds Tobacco, Liggett, Imperial Tobacco, and Lorillard), executed the 2016 and 2017 NPM Adjustments Settlement Agreement (the “2016 and 2017 NPM Adjustments Settlement Agreement”) settling disputes related to the 2016-2017 NPM Adjustments, as further described below. On various dates in July through September 2020, the State and other states among the initial 26 jurisdictions that joined the NPM Adjustment Settlement Agreement, and signatory tobacco manufacturers, executed the 2018 Through 2022 NPM Adjustments Settlement Agreement (the “2018-2022 NPM Adjustments Settlement Agreement”) settling disputes related to the 2018-2022 NPM Adjustments, as further described below. In the first quarter of 2020, the PMs agreed that, with respect to the 10 jurisdictions that joined the NPM Adjustment Settlement Agreement in 2018, certain conditions set forth in the NPM Adjustment Settlement Agreement had been met, and as a result, the PMs’ settlement with Pennsylvania was extended to include NPM Adjustments for 2018-2024 and settlements with the other nine states were extended to include NPM Adjustments for 2018-2019, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended

264 June 30, 2020. The signatory jurisdictions to the NPM Adjustment Settlement Term Sheet, the NPM Adjustment Settlement Agreement and related joinder agreements, the 2016 and 2017 NPM Adjustments Settlement Agreement and the 2018-2022 NPM Adjustments Settlement Agreement, as applicable, are referred to herein as the “NPM Adjustment Settlement Signatories” (which term, where appropriate, includes any additional jurisdictions that may in the future sign the settlement), and the settlements effected by the NPM Adjustment Settlement Term Sheet, the NPM Adjustment Settlement Agreement and related joinder agreements, the 2016 and 2017 NPM Adjustments Settlement Agreement and the 2018-2022 NPM Adjustments Settlement Agreement, as applicable, are referred to herein as the “NPM Adjustment Settlement.” Additional jurisdictions were permitted to join the settlement up to the end date of the last individual state-specific diligent enforcement hearings for the 2003 NPM Adjustment claims, although with potentially different and potentially less favorable payment obligations than those detailed in the NPM Adjustment Settlement. After such time, additional jurisdictions may join the settlement only if the signatory PMs, in their sole discretion, agree.

The NPM Adjustment Settlement Term Sheet was subject to approval by the Arbitration Panel. On March 12, 2013, the Arbitration Panel issued its Stipulated Partial Settlement and Award (the “NPM Adjustment Stipulated Partial Settlement and Award”). In the NPM Adjustment Stipulated Partial Settlement and Award, the Arbitration Panel, as a threshold matter, ruled that it had jurisdiction (i) to enter the NPM Adjustment Stipulated Partial Settlement and Award, (ii) to rule on the objections of those jurisdictions that did not join the settlement (the “NPM Adjustment Settlement Non-Signatories”, which term as used herein excludes the State of New York, which entered into a separate settlement with the PMs relating to the NPM Adjustment), (iii) to determine how the 2003 NPM Adjustment settlement would be allocated among the NPM Adjustment Settlement Non-Signatories in light of the settlement and (iv) to incorporate and direct the MSA Auditor to implement the provisions of the NPM Adjustment Settlement Term Sheet, including as they pertain to years beyond 2003. The Arbitration Panel noted that it was neither “approving” the NPM Adjustment Settlement Term Sheet nor assessing the merits of any NPM Adjustment dispute, but giving effect to the NPM Adjustment Settlement Signatories’ and signatory PMs’ agreed settlement payments as among themselves, by directing the MSA Auditor to implement the settlement provisions at issue.

In the NPM Adjustment Stipulated Partial Settlement and Award, the Arbitration Panel specifically directed the MSA Auditor (i) to release approximately $1.76 billion (plus accumulated earnings thereon) from the DPA to the NPM Adjustment Settlement Signatories, allocating such released amount among the NPM Adjustment Settlement Signatories as they directed in connection with the April 2013 MSA payment and (ii) to apply a credit in the aggregate amount of approximately $1.65 billion to the OPMs’ MSA payments, allocating such credit among the OPMs as they directed with 50% of the credit applied against the April 2013 MSA payment and 12.5% to be applied against each of the April 2014 through 2017 MSA payments. Such release to NPM Adjustment Settlement Signatories from the DPA and such application of credits to PMs’ MSA payments effected the settlement of the 2003 through 2012 NPM Adjustment claims. Under the NPM Adjustment Settlement, parallel provisions exist for SPMs, which stipulated a credit of approximately $31 million to the SPMs’ April 2013 MSA payments. The NPM Adjustment Settlement provided for the NPM Adjustment Settlement Signatories to allocate the settlement amount for the 2003 NPM Adjustment among themselves (through the application of the credits to PMs or the receipt by the NPM Adjustment Settlement Signatories of amounts released from the DPA, or both) so as to fully compensate those NPM Adjustment Settlement Signatories whose diligent enforcement for 2003 was non-contested.

While not ruling on years subsequent to the 2003 NPM Adjustment, the Arbitration Panel ruled that the reduction of the 2003 NPM Adjustment, in light of the NPM Adjustment Stipulated Partial Settlement and Award (for purposes of allocating the 2003 NPM Adjustment to the NPM Adjustment Settlement Non-Signatories), would be on a pro rata basis: the dollar amount of the 2003 NPM Adjustment would be reduced by a percentage equal to the aggregate allocable share of the NPM Adjustment Settlement Signatories. In addition, the Arbitration Panel directed the MSA Auditor to treat the NPM Adjustment Settlement Signatories as not being subject to the 2003 NPM Adjustment, resulting in a reallocation of the NPM Adjustment Settlement Signatories’ share of the 2003 NPM Adjustment among those NPM Adjustment Settlement Non-Signatories that are found not to have diligently enforced their Qualifying Statutes during 2003. This framework would create an incentive for NPM Adjustment Settlement Non-Signatories to contest the diligent enforcement of NPM Adjustment Settlement Signatories for years 2004 onward. The Arbitration Panel concluded that the NPM Adjustment Settlement Term Sheet and the NPM Adjustment Stipulated Partial Settlement and Award do not legally prejudice or adversely affect the NPM Adjustment Settlement Non-Signatories, but that, should an NPM Adjustment Settlement Non-Signatory found by the Arbitration Panel to be

265 non-diligent have a good faith belief that the pro rata reduction method did not adequately compensate it for an NPM Adjustment Settlement Signatory’s removal from the reallocation pool, its relief, if any, is by appeal to its individual MSA state court. The NPM Adjustment Settlement Non-Signatories that were found to be non-diligent with respect to the 2003 NPM Adjustment claims filed motions in their MSA state courts objecting to the pro rata reduction method; see “—2003 NPM Adjustment Arbitration Results and Disputes Concerning the NPM Adjustment Settlement Term Sheet and Stipulated Partial Settlement and Award” below for a discussion of such motions. The Arbitration Panel further concluded that neither the NPM Adjustment Stipulated Partial Settlement and Award nor the NPM Adjustment Settlement Term Sheet constitutes an amendment to the MSA that would require the consent of any NPM Adjustment Settlement Non-Signatory. No assurance can be given, however, that a court would not hold that the NPM Adjustment Stipulated Partial Settlement and Award and the NPM Adjustment Settlement constitute amendments to the MSA. See “RISK FACTORS—Other Risks Relating to the MSA and Related Statutes— Amendments, Waivers and Termination” and “—Reliance on State Enforcement of the MSA; State Impairment.”

In addition to settling the 2003 through 2012 NPM Adjustment claims as described above, the NPM Adjustment Settlement sets forth the terms by which NPM Adjustments for sales years 2013 onward are to be determined. Under the NPM Adjustment Settlement, sales years 2013-2014 were transition years for which an adjustment was applied in payment years 2014-2015 for SET-Paid NPM Sales, as described below, and for which an adjustment for Non-SET-Paid NPM Sales, as described below, did not apply. In October 2017, pursuant to the NPM Adjustment Settlement Agreement, the NPM Adjustment Settlement Signatories and signatory PMs agreed similarly to settle sales year 2015 as a transition year, and the signatory PMs received an adjustment to the MSA payments in April 2018 for SET-Paid NPM Sales as a result of the settlement of 2015 as a transition year (such adjustment being 25% of the maximum 2015 NPM Adjustment of the NPM Adjustment Settlement Signatories). In 2018, pursuant to the 2016 and 2017 NPM Adjustments Settlement Agreement, claims related to the 2016-2017 NPM Adjustments were settled, and the signatory PMs received an adjustment to the MSA payments in April 2019 and April 2020, as described below under “—2016 and 2017 NPM Adjustments Settlement Agreement.” In July and August 2020, pursuant to the 2018-2022 NPM Adjustments Settlement Agreement, claims related to the 2018-2022 NPM Adjustments were settled, and the signatory PMs will receive adjustments to the MSA payments in April 2021 through April 2025 (with respect to the MSA payments payable to the initial 26 jurisdictions, including the State, that executed the NPM Adjustment Settlement Agreement) and April 2022 through April 2026 (with respect to the MSA payments payable to any additional signatories to the 2018-2022 NPM Adjustments Settlement Agreement), as described below under “—2018 Through 2022 NPM Adjustments Settlement Agreement.” Furthermore, pursuant to the NPM Adjustment Settlement, beginning with the 2022 NPM Adjustment, the OPMs shall not receive any part of the NPM Adjustment allocated to any NPM Adjustment Settlement Signatory for any year for which the aggregate Market Share of all the PMs, as determined by the MSA Auditor using the 0.0325 roll-your-own conversion factor, is equal to or exceeds 97%.

Beginning in 2013, there is a state-specific adjustment that applies to sales of SET-paid NPM cigarettes (“SET-Paid NPM Sales”). “SET” consists of state cigarette excise tax or other state tax on the distribution or sale of cigarettes (other than a state or local sales tax that is applicable to consumer products generally and is not in lieu of an excise tax) and, after 2014, any excise or other tax imposed by a state or federally recognized tribe on the distribution or sale of cigarettes (other than a tribal sales tax that is applicable to consumer products generally and is not in lieu of an excise tax). For SET-Paid NPM Sales of “Non-Compliant NPM Cigarettes” (defined in the NPM Adjustment Settlement, with certain exceptions, as any NPM cigarette on which SET was paid but for which escrow is not deposited as required by the Model Statute, either by payment by the NPM or by collection upon a bond, or for which escrow was impermissibly released or refunded), the adjustment of PM payments due from signatory PMs is three times the per-cigarette escrow deposit rate contained in the Model Statute for the year of the sale, including the inflation adjustment in the statute. There is a proportional adjustment for each signatory SPM in proportion to the size of its MSA payment for that year. An NPM Adjustment Settlement Signatory will not be subject to this revised adjustment (thus, creating a safe harbor) if (i) the total number of Non-Compliant NPM Cigarettes sold in such state during the sales year in question did not exceed 4% of all NPM cigarettes on which such state’s SET was paid during such year, or (ii) the total number of Non-Compliant NPM Cigarettes sold in such state during such sales year did not exceed 2 million cigarettes.

Non-SET-Paid NPM Sales (“Non-SET-Paid NPM Sales”) will be handled as to the NPM Adjustment Settlement Signatories per the terms of the MSA, with the following adjustments. A data clearinghouse (the “Data Clearinghouse”) will calculate the total FET-paid NPM volume in the Settling States and nationwide. “FET” means

266 the federal excise tax. Beginning in 2016, for Non-SET-Paid NPM Sales, the total NPM Adjustment liability, if any, of each NPM Adjustment Settlement Signatory under the original formula for a year would be reduced by a percentage (the “SET-Paid NPM Percentage”) equal to the sum of (i) the percentage represented by the fraction of the total number of NPM cigarettes on which SET was paid in such year in the Settling States, divided by the total nationwide number of NPM cigarettes on which FET was paid in such year, plus (ii) in the case of an NPM Adjustment Settlement Signatory that has, as of January 1 of the year at issue, approved the PSS Credit Amendment (even if the PSS Credit Amendment has not yet taken effect), the percentage represented by the fraction of (x) the total number of NPM cigarettes on which an equity fee was paid in such year in those Previously Settled States that had in effect an equity fee law for the entirety of such year (which, by its terms, imposed a per-cigarette payment equal to or greater than 90% of the escrow amount for sales made that year under the Model Statute on all NPM cigarette sales in such state that it has the authority under federal law to tax), divided by (y) the total nationwide number of NPM cigarettes on which FET was paid in such year. Such liability reduction will be effectuated by each NPM Adjustment Settlement Signatory that is found non-diligent and allocated a share of the NPM Adjustment amount receiving a reimbursement by the signatory PMs. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT — Adjustments to Payments — Previously Settled States Reduction — PSS Credit Amendment.”

The NPM Adjustment Settlement provides that the arbitration regarding NPM Adjustment Settlement Signatories’ diligent enforcement for a specified year will not commence until the diligent enforcement arbitration for such year begins as to NPM Adjustment Settlement Non-Signatories (with an exception for an accelerated schedule as described therein). In the interim, pending the ultimate outcome of the applicable proceedings with respect to NPM Adjustments, the signatory PMs will deposit into the DPA on the next April’s MSA payment date the NPM Adjustment Settlement Signatories’ aggregate Allocable Share of the potential maximum NPM Adjustment for such sales year, and the PMs and the NPM Adjustment Settlement Signatories will jointly instruct the MSA Auditor to release promptly the entire amount deposited to the DPA and distribute it among the PMs and the NPM Adjustment Settlement Signatories according to a formula. Pursuant to such formula, (x) the amount released to the NPM Adjustment Settlement Signatories would be (1) the SET-Paid NPM Percentage with respect only to NPM Adjustment Settlement Signatories (plus other factors as specified in Section VI.I.1 of the NPM Adjustment Settlement Agreement), plus (2) 50% of the portion that remains, and (y) the amount released to the PMs would be the other 50% of the portion that remains. The amount released pursuant to clause (x)(1) of the prior sentence is based on an estimate of the reimbursement percentage determined by the Data Clearinghouse. The NPM Adjustment Settlement also provides that, except for the DPA deposit (and subsequent release) described above, and except in certain other cases (primarily, if the dispute was noticed for arbitration by the PM and the party-selected arbitrator has not been appointed for over one year from the date notice was first given despite good faith efforts by the PM), the PMs will not withhold payments or pay into the DPA based on a dispute arising out of the NPM Adjustment as set forth in the NPM Adjustment Settlement.

In the NPM Adjustment Settlement, the NPM Adjustment Settlement Signatories agree that diligent enforcement will be determined as to them in a single arbitration each year. The NPM Adjustment Settlement further states that the NPM Adjustment Settlement Signatories and the PMs shall cooperate in merging the NPM Adjustment arbitration as to the NPM Adjustment Settlement Signatories with the NPM Adjustment arbitration for the year in question as to the NPM Adjustment Settlement Non-Signatories.

In furtherance of the NPM Adjustment Settlement framework and NPM Adjustment Stipulated Partial Settlement and Award, the State in 2013 amended the definition of “units sold” subject to the required escrow deposits under the Qualifying Statute to be “the number of individual cigarettes sold to a consumer in the state by the applicable tobacco product manufacturer, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, during the year in question, regardless of whether the state excise tax was due or collected.” See “STATE LAWS RELATED TO THE MSA—California Qualifying Statute.” See also “RISK FACTORS—Other Risks Relating to the MSA and Related Statutes—Amendment to the State’s Qualifying Statute” and “LEGAL CONSIDERATIONS—MSA and Qualifying Statute Enforceability.”

The NPM Adjustment Settlement sets forth a framework for determining whether an NPM Adjustment Settlement Signatory diligently enforced its Qualifying Statute. Pursuant to the NPM Adjustment Settlement, the diligent enforcement standard applies to all NPM cigarettes on which federal excise tax was paid that the NPM Adjustment Settlement Signatory reasonably could have known about and that such state has the authority under

267 federal law to tax or to subject to the escrow requirement, including (i) all such sales made via the internet, (ii) all such tribal sales or sales on tribal lands, and (iii) all such sales that may otherwise constitute contraband (regardless of whether the state’s Qualifying Statute imposes a broader or narrower escrow requirement). The NPM Adjustment Settlement provides that no determination that an NPM Adjustment Settlement Signatory failed to diligently enforce a Qualifying Statute may be based on the state’s failure to collect escrow on NPM cigarettes that federal law prohibits the state from subjecting to the escrow requirement, regardless of whether the state has authority under federal law to tax such cigarettes, provided the state used reasonable efforts (i) to oppose any claims of such prohibition and (ii) to appeal any ruling finding that such prohibition exists. Pursuant to the NPM Adjustment Settlement, the following are exempt from the diligent enforcement standard: (i) NPM cigarettes sold on a federal installation in a transaction that is exempt from state taxation under federal law, and (ii) NPM cigarettes sold on a Native American tribe’s reservation (which includes Indian Country as defined by federal law) by an entity more than 50% of which is owned, and which is operated, by that tribe or member of that tribe to a consumer who is an adult member of that tribe in a transaction that is exempt from state taxation under federal law.

Pursuant to the NPM Adjustment Settlement, factors relevant to the diligent enforcement determination for an NPM Adjustment Settlement Signatory include, but are not limited to: (i) whether the number of NPM cigarettes on which SET was paid in such state in the year in question was reduced by virtue of a state policy or agreement not to require or collect SET of the state where due or not to enforce an SET stamping requirement of the state, or an indifference of the state to such SET collection or to enforcement of such SET stamping requirement, unless escrow was deposited on such SET-unpaid cigarettes; and (ii) whether the actual number of NPM cigarettes on which SET was paid in such state during that year significantly exceeded the number of such cigarettes used in Non-Compliant NPM Cigarette calculations pursuant to the NPM Adjustment Settlement.

No assurance can be given as to the implementation in future years of the NPM Adjustment Settlement by the MSA Auditor with regard to the State, as to whether or not the NPM Adjustment Settlement will be revised and any consequences thereto, or the effect of such factors on the amount and/or timing of Tobacco Settlement Revenues available to the Agency to pay debt service on the Series 2020 Bonds. See also “—2003 NPM Adjustment Arbitration Results and Disputes Concerning the NPM Adjustment Settlement Term Sheet and Stipulated Partial Settlement and Award” below.

See APPENDIX C — “NPM ADJUSTMENT SETTLEMENT AGREEMENT,” and — “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” and — “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the NPM Adjustment Settlement Agreement and related extension settlements. The Tobacco Settlement Revenues Projection Methodology and Assumptions include an assumption that there will not be an NPM Adjustment. See “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.”

2016 and 2017 NPM Adjustments Settlement Agreement

Pursuant to the 2016 and 2017 NPM Adjustments Settlement Agreement, the disputes relating to the 2016- 2017 NPM Adjustments were settled, providing for the following adjustments to the NPM Adjustments. First, the PM’s Annual Payments made for the benefit of the states signatory to the 2016 and 2017 NPM Adjustments Settlement Agreement (the “2016-17 Settlement Signatory States”) are not subject to downward adjustment pursuant to Section V.B of the NPM Adjustment Settlement Agreement (the “Section V.B Adjustment”) relating to Non-Compliant NPM Cigarettes (as defined herein) for the 2015 sales year. See “—NPM Adjustment Settlement” above. Second, in lieu of the 2016 NPM Adjustment and the 2017 NPM Adjustment (as defined in the NPM Adjustment Settlement Agreement), the PMs received, as applicable to the 2016-17 Settlement Signatory States, the following adjustments applied to their MSA payments due April 16, 2019 (with respect to the 2016 NPM Adjustment) and April 16, 2020 (with respect to the 2017 NPM Adjustment): (A) an aggregate adjustment applicable to Annual Payments, subject to quarterly recognition provisions under the NPM Adjustment Settlement Agreement, equal to 25% of the Potential Maximum 2016 NPM Adjustment and 2017 NPM Adjustment applicable to Annual Payments and to Strategic Contribution Payments (as applicable) multiplied by the aggregate Allocable Share of all 2016-17 Settlement Signatory States. Such aggregate amount is allocated to the PMs as provided in the 2016 and 2017 NPM Adjustments Settlement Agreement, and is allocated solely to and among the 2016-17 Settlement Signatory States, in proportion to their Allocable Shares and Strategic Contribution Payments Allocable Shares, as applicable; and (B) the amounts of

268 the adjustments pursuant to clause (A) immediately above are determined based on the Market Share Loss for 2016 and the Potential Maximum NPM Adjustment for 2016, and the Market Share Loss for 2017 and the Potential Maximum NPM Adjustment for 2017, as applicable, as determined by the MSA Auditor in the latest Final Calculation or Revised Final Calculation preceding the April 16, 2018 Payment Due Date and the April 15, 2019 Payment Due Date, respectively, and are not subject to the Section V.B Adjustment for the 2016 sales year. Capitalized terms used in this paragraph and not defined have the meanings given in the 2016 and 2017 NPM Adjustments Settlement Agreement. See APPENDIX C-2 — “2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the 2016 and 2017 NPM Adjustments Settlement Agreement.

2018 Through 2022 NPM Adjustments Settlement Agreement

Pursuant to the 2018-2022 NPM Adjustments Settlement Agreement, the disputes relating to the 2018-2022 NPM Adjustments were settled, and sales years 2018-2022 were added as transition years as described in Section V of the NPM Adjustment Settlement Agreement. The states that execute the 2018-2022 NPM Adjustments Settlement Agreement (the “2018-2022 Settlement Signatory States”) will not be subject to the NPM Adjustment for sales years 2018-2022 (resulting in certain amounts released to the 2018-2022 Settlement Signatory States on or before the April 2021 MSA payment date relating to the 2018 NPM Adjustment claims and on or before the April 2022 MSA payment date relating to the 2019 NPM Adjustment claims, and resulting in no withholdings by the PMs in payment years 2020-2022 with respect to 2018-2022 Settlement Signatory States), and the PMs will receive credits relating to sales years 2018-2022 as described as follows. In lieu of the 2018 through 2022 NPM Adjustments with respect to sales years 2018-2022 applicable to the 2018-2022 Settlement Signatory States, each PM will receive a transition year adjustment to its Annual Payment in payment years 2021-2025 (with respect to the initial 26 jurisdictions, including the State, that executed the NPM Adjustment Settlement Agreement) and payment years 2022-2026 (with respect to any additional signatories to the 2018-2022 NPM Adjustments Settlement Agreement), allocated solely to and among the respective 2018-2022 Signatory States as such States will direct. As to each PM, the amount of its transition year adjustment credit for a sales year applied in a given payment year shall equal the product of (a) the Potential Maximum NPM Adjustment allocated to that PM (as calculated by the MSA Auditor in the Final Notice for such sales year as revised in the year immediately preceding application of the credit, but which shall not change regardless of any subsequent revision of the Final Notice by the MSA Auditor), (b) the aggregate Allocable Share of the applicable group of 2018-2022 Settlement Signatory States (for example, the initial 26 jurisdictions that executed the NPM Adjustment Settlement Agreement), and (c) 25%. For each of the 2018-2022 transition years, the adjustment for SET- Paid NPM Sales will continue to apply and the adjustment for Non-SET-Paid NPM Sales will not apply. Capitalized terms used in this paragraph and not defined have the meanings given in the 2018-2022 NPM Adjustments Settlement Agreement. See APPENDIX C-3 — “2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT AGREEMENT” for a copy of the 2018-2022 NPM Adjustments Settlement Agreement. In connection with its execution of the 2018-2022 NPM Adjustments Settlement Agreement, the State also signed the optional Document Production Agreement, Bootleg Agreement, Reporting Agreement and Tribal Compacting Agreement contained as exhibits to the 2018-2022 NPM Adjustments Settlement Agreement.

2003 NPM Adjustment Arbitration Results and Disputes Concerning the NPM Adjustment Settlement Term Sheet and Stipulated Partial Settlement and Award

On September 11, 2013, the Arbitration Panel released its decisions in connection with the 2003 NPM Adjustment disputes with respect to each of the fifteen contested states that were NPM Adjustment Settlement Non- Signatories. The Arbitration Panel determined that nine states diligently enforced their respective Qualifying Statutes during 2003, and six states (Indiana, Kentucky, Maryland, Missouri, New Mexico and Pennsylvania, which have an aggregate allocable share of approximately 14.68%) did not diligently enforce their respective Qualifying Statutes during 2003. As a result, the nine states that were determined to have diligently enforced their respective Qualifying Statutes, as well as the jurisdictions that were either not contested or were not subject to the arbitration proceedings, were not to be subject to the 2003 NPM Adjustment, and their share of the 2003 NPM Adjustment was to be reallocated in accordance with the MSA to the six states found by the Arbitration Panel to have not diligently enforced their respective Qualifying Statutes during 2003.

The Arbitration Panel’s decisions regarding 2003 diligent enforcement defined diligent enforcement as “an ongoing and intentional consideration of the requirements of a Settling State’s Qualifying Statute, and a significant

269 attempt by the Settling State to meet those requirements, taking into account a Settling State’s competing laws and policies that may conflict with its MSA contractual obligations.” The Arbitration Panel considered various factors in deciding whether or not a state met the diligent enforcement standard, including, in no particular order, (i) such state’s collection rate of amounts to be deposited by NPMs into escrow accounts, (ii) the number of lawsuits against manufacturers brought by such state, (iii) how the state gathered reliable data, (iv) resources allocated to enforcement, (v) prevention of non-compliant NPMs from future sales, (vi) legislation enacted by the state, (vii) actions short of legislation taken by the state, and (viii) efforts made to be aware of NAAG and other states’ enforcement efforts. The Arbitration Panel stated that such factors were not necessarily given equal weight, but were considered as a whole. Where certain terms defined in the Model Statute were disputed, the Arbitration Panel relied on the plain meaning of the defined terms and did not penalize states for a rational interpretation of the terms in enforcing their Qualifying Statutes. The Arbitration Panel did not penalize states that provided rational reasons for implementing policies and legislation with respect to enforcement of their Qualifying Statutes, finding that a good faith effort to address an issue where there is no evidence of intentional escrow evasion was an indication of diligent enforcement. The Arbitration Panel also stated that although the Settling States are required under the MSA to diligently enforce their Qualifying Statutes, the Settling States are not required “to elevate those obligations above other statutory or rational policy considerations.”

Several states, including all six states that were found to be non-diligent in the 2003 NPM Adjustment claims arbitration, disputed the NPM Adjustment Settlement Term Sheet and NPM Adjustment Stipulated Partial Settlement and Award. As an initial step, on March 13, 2013, the Office of the Attorney General of the State of Illinois sent a letter, on behalf of itself and 23 other NPM Adjustment Settlement Non-Signatories (to which letter several additional NPM Adjustment Settlement Non-Signatories later joined), to the MSA Auditor, affirming their position that the Arbitration Panel lacked jurisdiction and that the NPM Adjustment Stipulated Partial Settlement and Award was inconsistent with the terms of the MSA, and informing the MSA Auditor that they objected to and would contest any action by the MSA Auditor to release funds from the DPA or to reallocate the 2003 NPM Adjustment under the terms of the NPM Adjustment Stipulated Partial Settlement and Award. Subsequently, motions were filed by various NPM Adjustment Settlement Non-Signatories in their respective MSA courts to vacate and/or modify the NPM Adjustment Stipulated Partial Settlement and Award. Two of the states (Colorado and Ohio) had also unsuccessfully sought to preliminarily enjoin the implementation of the NPM Adjustment Stipulated Partial Settlement and Award (but the MSA Auditor carried out the implementation of the NPM Adjustment Stipulated Partial Settlement and Award over the objections of the NPM Adjustment Settlement Non-Signatories, as discussed above).

The status of the motions filed by the six states that were determined by the Arbitration Panel in the 2003 NPM Adjustment dispute not to have diligently enforced their Qualifying Statutes in sales year 2003, is as follows. Indiana and Kentucky joined the NPM Adjustment Settlement in 2014 and those states stayed any further proceedings on their motions. In Pennsylvania, the state court entered an order that modified the judgment reduction method that had been adopted by the Arbitration Panel: the Pennsylvania court ruled that the states that signed the NPM Adjustment Settlement and had been contested in the 2003 NPM Adjustment arbitration (such as the State) would be deemed non-diligent for purposes of calculating Pennsylvania’s share of the 2003 NPM Adjustment, resulting in a partial reduction of Pennsylvania’s share of the 2003 NPM Adjustment allocation. Upon appeal, in April 2015, the intermediate appellate court in Pennsylvania upheld the trial court ruling. The Pennsylvania Supreme Court declined to take the PMs’ appeal of that ruling. The defendant PMs filed a petition for writ of certiorari with the U.S. Supreme Court in April 2016, which was denied in October 2016. Similar to Pennsylvania, the state court in Missouri entered an order that modified the judgment reduction method that had been adopted by the Arbitration Panel, which order reduced Missouri’s share of the NPM Adjustment allocation. Upon appeal, in September 2015, the intermediate appellate court in Missouri reversed the trial court ruling. Missouri appealed that ruling to the Missouri Supreme Court, and on February 14, 2017, the Supreme Court of Missouri issued a ruling affirming the trial court decision and overturning the intermediate appellate court decision. The Missouri Supreme Court’s decision found in part that the Arbitration Panel exceeded its authority by deeming the NPM Adjustment Settlement Signatories diligent for purposes of reallocation and applying the pro rata judgment reduction. The Supreme Court of Missouri, in its February 14, 2017 decision, also denied Missouri’s motion to order the PMs to arbitrate the question of Missouri’s diligent enforcement in a single-state arbitration for 2004. In addition, Missouri had negotiated a settlement with PMs regarding the NPM Adjustment but failed to consummate that settlement because the Missouri legislature did not adopt an Allocable Share Release Amendment by the April 15, 2016 deadline that had been a condition to the settlement. In Maryland, that state’s motion challenging the judgment reduction method adopted by the Arbitration

270 Panel was denied by its state court. Upon appeal, in October 2015, the intermediate appellate court in Maryland reversed the trial court, the effect of which was to reduce Maryland’s share of the NPM Adjustment allocation. The Maryland Supreme Court declined to take the PMs’ appeal of that ruling. The PMs filed a petition for writ of certiorari with the U.S. Supreme Court in June 2016, which was denied in October 2016. Lastly, the New Mexico court granted that state’s motion challenging the judgment reduction method that had been adopted by the Arbitration Panel, thereby reducing that state’s share of the NPM Adjustment allocation.

No assurance can be given that other challenges to the NPM Adjustment Stipulated Partial Settlement and Award or NPM Adjustment Settlement will not be commenced in other MSA courts, nor can any prediction be made as to the effect on NPM Adjustment Settlement Signatories such as the State.

NPM Adjustment Settlement Non-Signatories’ Ongoing NPM Adjustment Claims

All of the NPM Adjustment Settlement Non-Signatories other than Montana and New Mexico (as described below) participated in a multi-state arbitration with respect to the 2004 NPM Adjustment. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, that arbitration initially concluded in July 2019, although Missouri was granted a hearing in June 2020, and as of July 24, 2020, no decisions have resulted from the arbitration. The 2004 NPM Adjustment arbitration is pending before two separate arbitration panels.

New Mexico had appealed a trial court ruling that the state must participate in the multi-state arbitration for 2004, and on October 9, 2019, the appellate court upheld the trial court’s ruling that New Mexico must participate in the multi-state arbitration for 2004, and in November 2019, the New Mexico Supreme Court declined to review that decision. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the arbitration hearing for New Mexico has not yet been scheduled. Montana had obtained a ruling from the Montana Supreme Court that the issue of diligent enforcement under the MSA must be heard before that state’s MSA court. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the PMs have agreed not to contest the applicability of the 2004 NPM Adjustment to Montana. According to Altria in its Form 10- Q filed with the SEC for the six-month period ended June 30, 2020, in April 2020, the State of Montana filed a motion in Montana state court against the PMs (including Philip Morris and a affiliate), claiming that Montana’s share of the NPM Adjustment amounts should be paid to Montana in advance of the resolution of disputes over the applicability of those adjustments (Philip Morris and a Nat Sherman affiliate have been placing the disputed NPM Adjustment amounts in the DPA). Montana seeks a total of approximately $43 million in disputed payments from all defendants combined, as well as treble and punitive damages, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the PMs have reached an agreement with the NPM Adjustment Settlement Non-Signatories (with the exception of Missouri and Montana) that the next round of NPM Adjustment arbitrations will encompass three years, 2005-2007, and the parties are currently in the process of selecting an arbitration panel for the 2005-2007 arbitration. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, Missouri is participating in the selection, but has agreed to arbitrate only one year, 2005, before the panel. No assurance can be given as to when proceedings for 2008 and subsequent years will be scheduled or the precise form those proceedings will take, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. Altria stated in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that it has continued to pursue the NPM Adjustments against jurisdictions that have not signed onto settlements.

Other Settlements

In October 2015, New York State entered into a settlement agreement with the OPMs and certain SPMs pursuant to which the 2004-2014 NPM Adjustment disputes were settled with respect to New York and pursuant to which a methodology for the NPM Adjustments for sales years 2015 onward is determined for such state, involving an adjustment for NPM cigarettes on which New York SET is paid, and credits to PMs for tribal NPM sales. The PMs have received amounts for sales years 2004-2018, and the PMs are currently involved in a proceeding pursuant to the New York settlement in which an independent investigator will determine the amounts due to the PMs from

271 New York for 2019 and 2020, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

No prediction can be given as to whether or when any NPM Adjustment Settlement Non-Signatories will enter into settlements with respect to their NPM Adjustment disputes, what form those settlements may take, or what effect, if any, such settlements will have on NPM Adjustment Settlement Signatories such as the State.

STATE LAWS RELATED TO THE MSA

California Qualifying Statute

By letter dated June 18, 1999, counsel for the OPMs notified the State that SB 822, the bill which contained the State’s escrow statute, was, if enacted without change, a Qualifying Statute and a Model Statute within the meaning of the MSA. Such bill was enacted without change on October 10, 1999 as the State’s Qualifying Statute, in Division 103, Part 3, Chapter 1, Sections 104555 et seq. of the California Health and Safety Code. The State’s Qualifying Statute is the Model Statute in the form attached to the MSA as Exhibit T, with certain modifications approved by the OPMs. By letter dated January 19, 2000, counsel to the OPMs confirmed that the OPMs will not dispute that the State’s Qualifying Statute constitutes a Model Statute under the MSA.

In 2003, the State enacted an Allocable Share Release Amendment to amend Section 104557 of the Health and Safety Code. The amendment changed the release calculation from being based on the State’s allocable share of the payments the NPM would have made if it were a signatory to the MSA to being based on the payments that the NPM would have made as a signatory to the MSA on account of units sold in the State by the NPM. A majority of the PMs, including all three OPMs, had indicated in writing that in the event a Settling State enacted legislation substantially in the form of the Model Allocable Share Release Amendment, the Settling State’s previously enacted Qualifying Statute would continue to constitute a Model Statute and a Qualifying Statute within the meaning of the MSA. The State’s Allocable Share Release Amendment was in the form of the Model Allocable Share Release Amendment.

In 2013, in furtherance of the NPM Adjustment Settlement and NPM Adjustment Stipulated Partial Settlement and Award, the State amended the definition of “units sold” in the State’s Qualifying Statute to be “the number of individual cigarettes sold to a consumer in the state by the applicable tobacco product manufacturer, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, during the year in question, regardless of whether the state excise tax was due or collected” (with the definition further providing that “units sold” does not include “cigarettes sold on federal military installations, sold by a Native American tribe to a member of that tribe on that tribe’s land, or that are otherwise exempt from state excise tax pursuant to federal law”). The State received letters from counsels to the OPMs and certain SPMs to the effect that such amendment does not affect the status of the State’s Qualifying Statute as a Qualifying Statute under the MSA. See “RISK FACTORS—Other Risks Relating to the MSA and Related Statutes—Amendment to the State’s Qualifying Statute” and “LEGAL CONSIDERATIONS—MSA and Qualifying Statute Enforceability.”

Pursuant to Section 104557 of the State’s Qualifying Statute, any tobacco product manufacturer selling cigarettes to consumers within the State, whether directly or through a distributor, retailer or similar intermediary or intermediaries, must either (i) become a PM and generally perform its financial obligations under the MSA or (ii) place into a qualified escrow fund by April 15 of the year following the year in question specified escrow amounts per unit sold during the year in question. Each tobacco product manufacturer that elects to place funds into escrow pursuant to the Qualifying Statute (as opposed to becoming a PM) shall annually certify to the Attorney General of the State that it is in compliance with the escrow deposit requirements of the Qualifying Statute. The Attorney General may bring a civil action on behalf of the State against any tobacco product manufacturer that fails to place into escrow the funds required under the Qualifying Statute. Any tobacco product manufacturer that fails in any year to place into escrow the funds required shall (1) be required within 15 days to place the funds into escrow as shall bring it into compliance with the Qualifying Statute (and the court, upon a finding of a violation of the escrow deposit requirements, may impose a civil penalty to be paid to the General Fund of the State in an amount not to exceed 5% of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 100% of

272 the original amount improperly withheld from escrow), (2) in the case of a knowing violation, be required within 15 days to place the funds into escrow as shall bring it into compliance with the Qualifying Statute (and the court, upon a finding of a knowing violation of the escrow deposit requirements, may impose a civil penalty to be paid to the General Fund of the State in an amount not to exceed 15% of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 300% of the original amount improperly withheld from escrow), and (3) in the case of a second knowing violation, be prohibited from selling cigarettes to consumers within the State, whether directly or through a distributor, retailer, or similar intermediary, for a period not to exceed two years. Each failure to make an annual deposit required under the Qualifying Statute constitutes a separate violation.

California Complementary Legislation

Pursuant to the provisions of Section 30165.1 of the California Revenue and Taxation Code (the State’s Complementary Legislation), every tobacco product manufacturer whose cigarettes are sold in the State, whether directly or through a distributor, retailer, or similar intermediary or intermediaries, shall execute and deliver on a form and in the manner prescribed by the State Attorney General, a certification to the Attorney General no later than the 30th day of April each year that, as of the date of the certification, the tobacco product manufacturer is either a PM that has made all payments calculated by the MSA Auditor to be due under the MSA, except to the extent the PM is disputing any of the payments, or is in full compliance with the State’s Qualifying Statute, including all installment payments required by the State’s Qualifying Statute and Complementary Legislation, and any regulations promulgated pursuant thereto. A tobacco product manufacturer located outside the U.S. shall provide to the Attorney General, and keep current, a list of all importers that sell or will be selling their cigarettes in the State.

A PM (whether located inside or outside the U.S.) shall include in its annual certification a complete list of its brand families. The PM shall update the list 30 days prior to any addition to or modification of its brand families. An NPM (whether located inside or outside the U.S.) shall include in its annual certification a complete list of all of its brand families in accordance with the following requirements: (A) separately listing brand families of cigarettes and the number of units sold for each brand family that were sold in the State during the preceding calendar year, (B) separately listing all of its brand families that have been sold in the State at any time during the current calendar year, (C) indicating by an asterisk any brand family sold in the State during the preceding calendar year that is no longer being sold in the State as of the date of the certification and (D) identifying by name and address any other manufacturer, including all fabricators or makers of the brand families in the preceding or current calendar year in a form, manner, and detail as required by the Attorney General. The NPM shall update the list 30 days prior to any change in a fabricator for any brand family or any addition to or modification of its brand families. In the case of an NPM, the certification shall further certify all of the following: (A) that the NPM is registered to do business in the State, or has appointed a resident agent for service of process and provided notice thereof as required by the Complementary Legislation, (B) that the NPM has done all of the following: (i) established and continues to maintain a qualified escrow fund in accordance with the Qualifying Statute and implementing regulations, (ii) executed a qualified escrow agreement that has been reviewed and approved by the Attorney General and that governs the qualified escrow fund, and (iii) if the NPM is not the fabricator or maker of the cigarettes, that the escrow agreement, certification, reports, and any other forms required by the Qualifying Statute and implementing regulations are signed by the company that fabricates or makes the cigarettes and in the manner required by the Attorney General, (C) that the NPM is in full compliance with both of the following: (i) the Qualifying Statute, the Complementary Legislation, and any regulations promulgated pursuant thereto and (ii) the State’s Cigarette and Tobacco Products Licensing Act, and any regulations promulgated pursuant thereto (and the NPM shall provide a copy of a valid, corresponding federal permit issued by the United States Treasury, Alcohol and Tobacco Tax and Trade Bureau), (D) that the NPM has provided specified information regarding its qualified escrow fund, including the amount the NPM placed in the fund for cigarettes sold in the State during the preceding calendar year, the date and amount of each deposit, and any confirming evidence or verification as may be deemed necessary by the Attorney General, and the amounts and dates of any withdrawal or transfer of funds the NPM made at any time from the fund or from any other qualified escrow fund into which it ever made escrow payments pursuant to the Qualifying Statute.

Furthermore, each NPM located outside the U.S. and its importers are required to report, in the manner required by the Attorney General, all cigarette and tobacco products sold in the State each month, including, but not limited to, the quantity, including tobacco weight and number of cigarette sticks, the wholesale cost and sale price of each brand family. The State’s Complementary Legislation also provides that, not later than 25 days after the end of

273 each calendar quarter, and more frequently if so directed by the California Department of Tax and Fee Administration (formerly the Board of Equalization) (the “CDTFA”) or the Attorney General of the State, each distributor shall submit any information as the CDTFA or Attorney General requires to facilitate compliance with the Complementary Legislation, including, but not limited to, a list by brand family of the total number of cigarettes or, in the case of roll- your-own tobacco, the total ounces for which the distributor affixed stamps during the previous calendar month or otherwise paid the tax due.

In addition, the State’s Complementary Legislation requires that the Attorney General publish on its internet web site a directory listing all tobacco product manufacturers that have provided current, timely, and accurate certifications conforming to the annual certification requirements of the Complementary Legislation and all brand families that are listed in the certifications (except as specified in the Complementary Legislation). The Complementary Legislation sets forth procedures for removal of tobacco product manufacturers that no longer qualify for being named on the directory. The Complementary Legislation provides that no person shall affix, or cause to be affixed, any tax stamp or meter impression to a package of cigarettes, or pay the tax levied on a cigarette, unless the brand family of the cigarettes or tobacco product, and the tobacco product manufacturer that makes or sells the cigarettes or tobacco product, are included on the directory. The Complementary Legislation also provides that no person may sell, offer or possess for sale in the State, ship or otherwise distribute into or within the State or import for personal consumption in the State, cigarettes of a tobacco product manufacturer or brand family not included in the then current directory. Furthermore, the Complementary Legislation provides that no person shall either (A) sell or distribute cigarettes that the person knows or should know are intended to be distributed in violation of the foregoing two sentences or (B) acquire, hold, own, possess, transport, import, or cause to be imported cigarettes that the person knows or should know are intended to be distributed in violation of the foregoing two sentences. Notwithstanding the foregoing, a licensed retailer may possess, transport and sell the tax-stamped cigarettes of a manufacturer or brand family affected by a notice of removal from the directory for no more than 60 days following the effective date of the manufacturer or brand family’s removal from the directory. After 60 days following removal from the directory, the cigarettes of a manufacturer or brand family identified in the related notice of removal are contraband and are subject to seizure and destruction and may not be purchased or sold in the State.

In addition to any other civil or criminal penalty provided by law, upon a finding that a person has affixed or caused to be affixed a tax stamp or meter impression in violation of the Complementary Legislation, or failed to submit quarterly information required by the CDTFA to facilitate compliance with the Complementary Legislation, as described above, the CDTFA may revoke or suspend the license or licenses issued to the person by the CDTFA.

State Statutory Enforcement Framework

The following information under this subheading “State Statutory Enforcement Framework” appeared in the Official Statement dated August 14, 2018 relating to the Enhanced Tobacco Settlement Asset-Backed Bonds, Series 2018A-2 of the Golden State Tobacco Securitization Corporation, a special purpose trust established as a not-for- profit corporation by Article 7 of Chapter 2 of Division 1 of Title 6.7 of the California Government Code, as amended. Although the Agency and the County have no knowledge of any facts indicating that the following information is inaccurate in any material respect, the Agency and the County have not verified this information and cannot and do not warrant the accuracy or completeness of this information. Further, neither the State nor the Golden State Tobacco Securitization Corporation is making any representation that such information is accurate or complete in connection with the Agency’s issuance and sale of the Series 2020 Bonds. The Series 2020 Bonds are not a debt of the State or the Golden State Tobacco Securitization Corporation.

California Statutory Enforcement Provisions.

The State’s statutory framework for enforcing laws relating to the manufacture, distribution, sale, possession and taxation of cigarettes within the State of California includes the State Qualifying Statute and Complementary Legislation, as well as, among other things:

• tax laws imposing taxes on cigarettes and other tobacco products (a $2.00 per pack increase in the State’s cigarette excise tax, in addition to the State’s then current $0.87 per pack excise tax, took effect April 1, 2017; Revenue and Taxation Code) and requiring stamps or meter impressions to be

274 affixed to packages of cigarettes prior to distribution to evidence payment of cigarette taxes (Revenue and Taxation Code);

• laws setting forth licensing requirements for tobacco products, manufacturers and retailers (Business and Professions Code and Revenue and Taxation Code);

• laws prohibiting smoking in most enclosed spaces of places of employment (including restaurants and bars), with certain exceptions (Labor Code; Government Code; Education Code; and Health and Safety Code);

• laws prohibiting smoking by employees and members of the public inside buildings owned or leased by the State, a county, a city, a city and county, or a California Community College district or within a specified distance of a main exit, entrance, or operable window of these buildings (Government Code);

• laws prohibiting smoking in a motor vehicle, whether in motion or at rest, in which there is a minor in the vehicle (Health and Safety Code);

• laws setting the minimum age for sales of tobacco products to minors at 21 (Penal Code and Business and Professions Code);

• laws prohibiting any person engaged in the retail sale of tobacco products or tobacco paraphernalia to sell, offer for sale, or display for sale, tobacco products or tobacco paraphernalia by self-service display, with certain exceptions, and laws governing the location of tobacco product vending machines (Business and Professions Code);

• laws governing internet sales of tobacco products, by virtue of the tax laws providing that no person may engage in a retail sale of cigarettes in the State unless the sale is a vendor-assisted, face-to-face sale, except that a person may engage in delivery sale of cigarettes or tobacco products to a person in the State if the delivery seller has fully complied with the Jenkins Act, obtains and maintains an applicable State license, complies with any applicable State law that imposes escrow or other payment obligations on tobacco product manufacturers and complies with any Attorney General reporting requirements (Revenue and Taxation Code);

• laws restricting advertising of tobacco products (Government Code and Business and Professions Code);

• health laws setting fire safety standards for cigarettes (Health and Safety Code); and

• various implementing regulations promulgated by the California Board of Equalization (currently the CDTFA).

Enforcement

This statutory enforcement framework is administered and enforced by the Office of the Attorney General of the State of California, the CDTFA, the California Fire Marshal, or the local public prosecutors in the city or county in which the violation occurred. See “—California Complementary Legislation” above.

Pursuant to the California Cigarette and Tobacco Products Licensing Act, upon discovery by the CDTFA or a law enforcement agency that a retailer or any other person possesses, stores, owns, or has made a retail sale of an unstamped package of cigarettes, the CDTFA or the law enforcement agency shall be authorized to seize unstamped packages of cigarettes at the retail, or any other person’s location, and any cigarettes seized will be deemed forfeited. In addition, upon discovery by the CDTFA or a law enforcement agency that a retailer or any other person possesses, stores, owns, or has made a retail sale of tobacco products on which tax is due but has not been paid to the CDTFA,

275 the CDTFA or law enforcement agency is authorized to seize such tobacco products at the retail, or any other person’s location, and any tobacco products seized will be deemed forfeited. In addition to any other civil or criminal penalty provided by law, upon a finding that a retailer has violated such provisions, the CDTFA may revoke or suspend the license of the retailer. (Business and Professions Code)

The California Cigarette and Tobacco Products Licensing Act also provides that, upon discovery by the CDTFA or a law enforcement agency that a distributor possesses, stores, owns, or has made a sale of an unstamped package of cigarettes bearing a counterfeit California state tax stamp or that a wholesaler possesses, stores, owns, or has made a sale of an unstamped package of cigarettes, the CDTFA or the law enforcement agency shall be authorized to seize the unstamped packages of cigarettes at the distributor’s or the wholesaler’s location, and any cigarettes seized will be deemed forfeited. In addition, upon discovery by the CDTFA or a law enforcement agency that a distributor or a wholesaler possesses, stores, owns, or has made a sale of tobacco products on which tax is due but has not been paid to the CDTFA, or its designee, the CDTFA or law enforcement agency is authorized to seize such tobacco products at the distributor or wholesaler location, and any tobacco products seized will be deemed forfeited. In addition to any other civil or criminal penalty provided by law, upon a finding that any distributor or any wholesaler has violated such provisions, the CDTFA may revoke or suspend the license of the distributor or wholesaler. (Business and Professions Code)

Further, the California Cigarette and Tobacco Products Licensing Act provides that a person or entity that engages in the business of selling cigarettes or tobacco products (including e-cigarettes) in the State either without a valid license or after a license has been suspended or revoked, and each officer of any corporation that so engages in such business, is guilty of a misdemeanor. Continued sales or gifting of cigarettes and tobacco products either without a valid license or after a notification of suspension or revocation shall result in the seizure of all cigarettes and tobacco products in the possession of the person by the CDTFA or a law enforcement agency. Any cigarettes and tobacco products seized by the CDTFA or by a law enforcement agency shall be deemed forfeited. (Business and Professions Code)

Indian Country Cigarette Sales

The State’s ability to enforce State laws, including State cigarette tax laws and regulatory provisions, is limited in various geographical areas in the State that constitute “Indian Country” as defined by 18 U.S.C. § 1151. The State does not have authority to regulate an Indian Tribe’s (“Tribe”) manufacture and wholesale distribution of tobacco products in its Indian Country when those products are not distributed outside of that Indian Country. The State is not aware of any cigarette manufacturers that are located in Indian Country within the State. However, one large cigarette distributor is located in Indian Country within the State. This distributor sells untaxed contraband cigarettes manufactured by NPMs to retailers located in Indian Country in the State and directly to members of the general public. The State also does not have authority to regulate sales of tobacco products to Indians in Indian Country or to collect the State cigarette tax on a sale to an Indian where the sale occurs in Indian Country. The State has authority to require a Tribe to collect the State cigarette tax on cigarettes sold in Indian Country to a non-Indian. (See Chemehuevi Indian Tribe v. California State Board of Equalization, 800 F.2d 1446 (9th Cir. 1986).) However, principles of Indian sovereign immunity limit the judicial remedies available to the State with respect to such sales. Numerous retailers located in Indian Country in the State sell untaxed contraband cigarettes to members of the general public, and the State has filed lawsuits against some of those retailers.

The State has not entered into any cigarette tax collection agreements with any Tribes located within the State.

See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—NPM Adjustment Claims and NPM Adjustment Settlement—NPM Adjustment Settlement.”

276 THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT

There follows a brief description of the Consent Decree, the MOU, the ARIMOU and the California Escrow Agreement. This description is not complete and is subject to, and qualified in its entirety by reference to, the terms of the Consent Decree, the MOU, the ARIMOU and the California Escrow Agreement. See APPENDIX D – “THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT” for copies of the Consent Decree, the MOU, the ARIMOU and the California Escrow Agreement.

General Description

On December 9, 1998, a Consent Decree and Final Judgment (the “Consent Decree”), which governs the class action portion of the State’s action against the tobacco companies, was entered in the Superior Court of the State of California for the County of San Diego. The Consent Decree, which is final and non-appealable, settled the litigation brought by the State against the OPMs and resulted in the achievement of California State-Specific Finality under the MSA. The Consent Decree incorporated by reference the MOU. The Superior Court of the State of California for the County of San Diego entered an order approving the ARIMOU on January 18, 2000. On July 30, 2001, an order was issued by the Superior Court of the State of California for San Diego County amending the ARIMOU with respect to certain rights of each Eligible City or County to transfer its MOU Proportional Allocable Shares (as defined in the ARIMOU) in tobacco securitizations.

Prior to the entering of the Consent Decree, the plaintiffs of certain pending lawsuits agreed, among other things, to coordinate their pending cases and to allocate certain portions of the recovery among the State and the Participating Jurisdictions. This agreement was memorialized in the MOU, by and among various counsel representing the State and a number of the Participating Jurisdictions. To set forth the understanding of the interpretation to be given to the terms of the MOU and to establish procedures for the resolution of any future disputes that may arise regarding the interpretation of the MOU among the State and the Participating Jurisdictions, the parties entered into the ARIMOU. Upon satisfying certain conditions set forth in the MOU and the ARIMOU, the Participating Jurisdictions are deemed to be “eligible” to receive a share of the tobacco settlement payments to which the State is entitled under the MSA. All of the Participating Jurisdictions under the MOU and ARIMOU, including the County, have satisfied the conditions of the MOU and the ARIMOU and are eligible to receive funds under the MOU and the ARIMOU. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—State-Specific Finality and Final Approval” herein.

Under the MOU, 45% of the State’s entire allocation of tobacco settlement payments under the MSA is allocated to the Participating Jurisdictions that are counties, 5% is allocated to the four cities that are Participating Jurisdictions (1.25% each), and the remaining 50% is retained by the State. The 45% share of the tobacco settlement payments allocated to the Participating Jurisdictions that are counties is allocated among the counties based on the proportion of each county’s population to the total State population as reported in the 1990 Official United States Decennial Census, as adjusted every ten years by the Official United States Decennial Census. Pursuant to the proportional allocable share provided in the MOU and the ARIMOU, the County is currently entitled to receive 0.420880% of the total statewide share of the tobacco settlement payments (based on adjustments made to reflect the 2010 Official United States Decennial Census.) This percentage is subject to adjustments for population changes every ten years based on the Official United States Decennial Census.

Flow of Funds and California Escrow Agreement

Under the MSA, the State’s portion of the tobacco settlement payments are deposited into the California State-Specific Account held by Citibank, N.A., as the MSA Escrow Agent. Pursuant to the terms of the MOU, the ARIMOU and an Escrow Agreement between the State and Citibank, N.A., as escrow agent (the “California Escrow Agent”), the State has instructed the MSA Escrow Agent to transfer (upon receipt thereof) all amounts in the California State-Specific Account to the California Escrow Agent. The California Escrow Agent will deposit the State’s 50% share of the tobacco settlement payments in an account for the benefit of the State (the “California State Government Escrow Account”), and the remaining 50% of the tobacco settlement payments into separate accounts (within the “California Local Government Escrow Account”) for the benefit of the Participating Jurisdictions. The transfer of

277 the tobacco settlement payments into the California Local Government Escrow Account is not subject to legislative appropriation by the State or any further act by the State, nor are such funds subject to any lien of the State.

Pursuant to the California Escrow Agreement, the California Escrow Agent will distribute to each Participating Jurisdiction (including the County) its allocable proportional share of the tobacco settlement payments as determined by the MOU and the ARIMOU, within one business day of a deposit into the California Local Government Escrow Account, unless the California Escrow Agent receives different instructions in writing from the State three business days prior to a deposit. See the ARIMOU included in APPENDIX D attached hereto for a list of the Participating Jurisdictions and their proportional allocable shares under the ARIMOU.

On July 30, 2001, an order was issued by the Superior Court of the State of California for the County of San Diego amending the ARIMOU (the “ARIMOU Amendment”). The order provides that an Eligible City or Eligible County participating in a tobacco securitization may provide that, once the related bonds are issued and so long as the related bonds are Outstanding, all amounts of its MOU Proportional Allocable Share may be transferred directly to the indenture trustee for the related bonds, and that so long as such bonds are Outstanding, no further transfer instructions may be provided to the State for transmission to the California Escrow Agent unless countersigned by the indenture trustee and, after the related bonds are repaid, unless countersigned by the relevant buyer. The County executed instructions to provide for transfer of its MOU Proportional Allocable Share directly to the Indenture Trustee pursuant to the ARIMOU Amendment.

All fees and expenses due and owing the California Escrow Agent will be deducted equally from the California State Government Escrow Account and the California Local Government Escrow Account prior to the disbursement of any funds pursuant to the California Escrow Agreement. Such fees are set forth in the California Escrow Agreement and may be adjusted to conform to its then current guidelines. If at any time the California Escrow Agent is served with any judicial or administrative order or decree that affects the amounts deposited with the California Escrow Agent, the California Escrow Agent is authorized to comply with such order or decree in any manner it or its legal counsel deems appropriate. If any fees, expenses or costs incurred by the California Escrow Agent or its legal counsel are not promptly paid, the California Escrow Agent may reimburse itself from tobacco settlement payments in escrow, but is not permitted to place a lien on any such tobacco settlement payments. The California Escrow Agreement provides that only the State and the California Escrow Agent, and their respective permitted successors, are entitled to its benefits.

The California Escrow Agreement also provides a mechanism for the State to escrow tobacco settlement payments to satisfy “claims over” entitling a PM to an offset for amounts paid under the MSA. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Adjustments to Payments—Offset for Claims-Over” herein.

Enforcement Provisions of the Consent Decree, the MOU and the ARIMOU

The MOU provides that the distribution of tobacco-related recoveries is not subject to alteration by legislative, judicial or executive action at any level, and, if such alteration were to occur and survive legal challenge, any modification would be borne proportionally by the State and the Participating Jurisdictions. The Consent Decree specifically incorporates the entire MOU as if it were set forth in full in the Consent Decree. Thus, the allocation of the State’s tobacco settlement payments under the MSA among the State and the Participating Jurisdictions set forth in the MOU is final and non-appealable. However, the MSA provides (and the Consent Decree confirms) that only the State is entitled to enforce the PMs’ payment obligations under the MSA, and the State is prohibited expressly from assigning or transferring its enforcement rights. In addition, under the ARIMOU the State and the Participating Jurisdictions are the only intended beneficiaries of the ARIMOU and the only parties entitled to enforce its terms and those provisions of the MOU incorporated into the ARIMOU.

Release and Dismissal of Claims

The MSA provides that, effective upon the occurrence of State-Specific Finality in the State, the State will release and discharge all past, present and future smoking-related claims against all Released Parties. In the MOU and the ARIMOU, the County and the other Participating Jurisdictions agreed that the sharing of the recovery in the State’s tobacco settlement payments under the MSA was conditioned upon the release by each Participating

278 Jurisdiction of all tobacco-related claims consistent with the extent of the State’s release and a dismissal with prejudice of any state or county’s pending action. The County has taken the necessary action to satisfy this condition.

279 CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY

The following description of the domestic tobacco industry has been compiled from certain publicly available documents of the tobacco companies and their current or former parent companies, certain publicly available analyses of the tobacco industry, and other public sources. Certain of those companies currently file annual, quarterly and certain other reports with the SEC. Such reports are available on the SEC’s website (www.sec.gov) and upon request from the SEC’s Investor Information Service, 100 F Street, NE, Washington, D.C. 20549 (phone: (800) SEC- 0330 or (202) 551-8090; e-mail: [email protected]). The following information does not, nor is it intended to, provide a comprehensive description of the domestic tobacco industry, the business, legal and regulatory environment of the participants therein, or the financial performance or capability of such participants. Although the Agency has no knowledge of any facts indicating that the following information is inaccurate in any material respect, the Agency has not verified this information and cannot and does not warrant the accuracy or completeness of this information. To the extent that reports submitted to the MSA Auditor by the PMs pursuant to the requirements of the MSA provide information that is pertinent to the following discussion, including market share information, the Attorney General of the State has not consented to the release of such information pursuant to the confidentiality provisions of the MSA. Prospective investors in the Series 2020 Bonds should conduct their own independent investigations of the domestic tobacco industry to determine if an investment in the Series 2020 Bonds is consistent with their investment objectives.

MSA payments are computed based in large part on cigarette shipments in or to the 50 states of the United States, the District of Columbia and Puerto Rico. The quantities of cigarettes shipped and cigarettes consumed within the 50 states of the United States, the District of Columbia and Puerto Rico may not match at any given point in time as a result of various factors, such as inventory adjustments, but are substantially the same when compared over a period of time.

Retail market share information, based upon shipments or sales as reported by the OPMs for purposes of their filings with the SEC, may be different from Relative Market Share for purposes of the MSA and the respective obligations of the PMs to contribute to Annual Payments. The Relative Market Share information reported is confidential under the MSA, except to the extent reported by NAAG. See “SUMMARY OF THE MASTER SETTLEMENT AGREEMENT—Overview of Payments by the Participating Manufacturers; MSA Escrow Agent” and “—Annual Payments.” Additionally, aggregate market share information, based upon shipments as reported by OPMs and reflected in the chart below entitled “Manufacturers’ Domestic Market Share of Cigarettes” is different from that utilized in the Tobacco Settlement Revenues Projection Methodology and Assumptions. See “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS.”

Industry Overview

According to NAAG, the OPMs accounted for approximately 81.11% (measuring roll-your-own cigarettes at 0.0325 ounces per cigarette conversion rate) of the U.S. domestic cigarette market in sales year 2019. See “— Industry Market Share” below. The market for cigarettes in the U.S. divides generally into premium and discount sales.

Philip Morris USA Inc. (“Philip Morris”), a wholly-owned subsidiary of Altria Group, Inc. (“Altria”), is the largest tobacco company in the U.S. Prior to a name change on January 27, 2003, Altria was named Philip Morris Companies Inc. In its Form 10-K filed with the SEC for the calendar year 2019, Altria reported that Philip Morris’s domestic cigarette market share for the year ended December 31, 2019 was 49.7% (based on retail sales data from IRI/Management Science Associate, Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends), compared to 50.2% for 2018 and 50.8% for 2017. In its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, Altria reported that Philip Morris’s domestic cigarette market share for the six months ended June 30, 2020 was 49.1%. Philip Morris’s major premium brands are , Virginia Slims and Parliament (with Marlboro representing approximately 86.9% of Philip Morris’s domestic cigarette shipment volume during the year ended December 31, 2019, according to Altria’s Form 10-K filed with the SEC for the calendar year 2019, and approximately 87.3% of Philip Morris’s domestic cigarette shipment volume during the six months ended June 30, 2020, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020). Marlboro is also the largest selling cigarette brand in the U.S., with approximately 43.1% and 43.2% of the U.S. domestic retail share for the years ended December 31, 2019 and 2018,

280 respectively, according to Altria in its Form 10-K filed with the SEC for the calendar year 2019, and approximately 42.8% of the U.S. domestic retail share for the six months ended June 30, 2020, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, and has been the world’s largest-selling cigarette brand since 1972. Philip Morris’s principal discount brands are Basic and L&M. In 2009, Altria acquired UST LLC, whose subsidiary, U.S. Smokeless Tobacco Company LLC (“UST”), is the leading producer of smokeless tobacco in the U.S. On May 22, 2018, Altria announced the creation of two divisions within Altria—one division for traditional cigarettes, pipe tobacco, cigars and snuff, and a second division for innovative, non-combustible, reduced-risk products such as vapor products. Altria reported that the new structure is expected, among other things, to accelerate innovation. According to Altria in its SEC filings, on March 8, 2019, Altria completed its acquisition, through a subsidiary, of a $1.8 billion, 45% economic and voting interest in Cronos Group Inc., a global cannabinoid company headquartered in Toronto, Canada, and in December 2018, Altria purchased, through a wholly-owned subsidiary, shares of non-voting convertible common stock of Juul Labs, Inc., representing a 35% economic interest, for $12.8 billion (Altria’s economic interest in Juul Labs, Inc. remained at 35% at June 30, 2020, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020). Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that during 2019, Altria recorded total pre-tax impairment charges of $8.6 billion related to its Juul Labs, Inc. investment, resulting in a $4.2 billion carrying value of such investment at December 31, 2019, with no additional impairment at June 30, 2020. Juul Labs, Inc. is engaged in the manufacture and sale of e-vapor products globally. On April 1, 2020, the U.S. Federal Trade Commission (“FTC”) filed an administrative complaint alleging that Altria’s acquisition of a 35% economic interest in Juul Labs, Inc. eliminated competition in violation of federal antitrust laws. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the administrative trial will take place before an FTC administrative law judge (with any ruling by the FTC to be subject to review by the FTC Commissioners and subsequently, by a federal appellate court), and such administrative trial is currently scheduled to begin April 13, 2021; if the FTC’s challenge is successful, the FTC may order a broad range of remedies, including divestiture of Altria’s minority investment in Juul Labs, Inc. and rescission of the transaction and all associated agreements. See “—E-Cigarettes and Vapor Products” below.

R.J. Reynolds Tobacco Company (“Reynolds Tobacco”) is the second-largest tobacco company in the U.S. Reynolds Tobacco is a wholly-owned subsidiary of Reynolds American Inc. (“Reynolds American”), which in turn is a wholly-owned subsidiary of British American Tobacco p.l.c. (“BAT”) following BAT’s acquisition on July 25, 2017 of the approximately 58% of Reynolds American stock not then owned by BAT. As a result of the acquisition by BAT, Reynolds American no longer files quarterly or annual reports with the SEC. BAT is subject to applicable SEC reporting obligations as a foreign private issuer. BAT is responsible for Reynolds Tobacco’s payment obligations under the MSA as a result of the acquisition of Reynolds Tobacco’s parent company Reynolds American. In an earlier merger, in June 2015, Reynolds American acquired Lorillard, Inc., the parent company of Lorillard Tobacco Company (“Lorillard”), the then third-largest tobacco company in the U.S., with Reynolds Tobacco continuing as the surviving entity. In yet an earlier merger, in July 2004, the U.S. operations of Brown & Williamson Tobacco Corporation (“B&W”) (the then third-largest tobacco company in the U.S.) were combined with Reynolds Tobacco. In its preliminary results for the year ended December 31, 2019, BAT reported that its U.S. retail cigarette market share at December 31, 2019 increased 30 basis points from 2018, and in its half-year report for the six months ended June 30, 2020, BAT reported that its U.S. cigarette market share increased 30 basis points. In its Annual Report on Form 20- F for the year ended December 31, 2018, BAT reported that its U.S. retail cigarette market share at December 31, 2018 declined 20 basis points from 2017. In its Annual Report for calendar year 2017, BAT reported a U.S. market share of 34.7%. In its Form 10-K filed with the SEC for the calendar year 2016, Reynolds American reported that Reynolds Tobacco’s domestic retail cigarette market share at December 31, 2016 and December 31, 2015 was 32.3%. Reynolds Tobacco’s major premium brands are Newport (which it acquired in the 2015 merger with Lorillard) and Camel, and its discount brands include and . BAT, through Reynolds American, is also the parent company of American Snuff Company, LLC, the second-largest smokeless tobacco products manufacturer in the U.S., and Santa Fe Natural Tobacco Company, Inc. (“Santa Fe Natural Tobacco Company”), an SPM that manufactures a super-premium cigarette brand.

Contemporaneous with the 2015 merger of Lorillard, Inc. into Reynolds American, Imperial Tobacco Group PLC, currently named Imperial Brands PLC (“Imperial Tobacco”) (through its subsidiary ITG Brands, LLC, an SPM under the MSA), purchased Reynolds Tobacco’s , and cigarette brands, Lorillard, Inc.’s cigarette brand and blu eCig electronic cigarette brand, and other assets. Imperial Tobacco is listed on the London

281 Stock Exchange and does not file quarterly or annual reports with the SEC. According to Imperial Tobacco’s annual report for the fiscal year ended September 30, 2019, Imperial Tobacco’s market share in the U.S. tobacco market at fiscal year-end 2019 was 8.8% (representing an increase from 8.7% at fiscal year-end 2017), making it the third- largest tobacco company in the U.S. market. In accordance with Section XVIII(c) of the MSA, which states that “[n]o Original Participating Manufacturer may sell or otherwise transfer or permit the sale or transfer of any of its Cigarette brands, Brand Names, Cigarette product formulas or Cigarette businesses … to any person or entity unless such person or entity is an Original Participating Manufacturer or prior to the sale or acquisition agrees to assume the obligations of an Original Participating Manufacturer with respect to such Cigarette brands, Brand Names, Cigarette product formulas or businesses,” the OPM payment obligations under the MSA with respect to the cigarette brands, brand names, cigarette product formulas and businesses acquired by Imperial Tobacco from Reynolds Tobacco and Lorillard have been assumed and continued by Imperial Tobacco. Imperial Tobacco also is the parent company of Commonwealth Brands, Inc. (“CBI”), an SPM under the MSA, which markets deep discount brands in the U.S., including USA Gold, Sonoma and .

Based on the domestic retail market shares discussed above, the remaining share of the U.S. retail cigarette market was held by a number of other cigarette manufacturers, including Liggett Group LLC (“Liggett”) (the operating successor to the Liggett & Myers Tobacco Company), an SPM under the MSA and a wholly-owned subsidiary of Ltd. (“Vector Group Ltd.”). In its Form 10-K filed with the SEC for the calendar year 2019, Vector Group Ltd. reported that the domestic market share of its Liggett subsidiary was 4.0% in 2019, 4.0% in 2018 and 3.7% in 2017. According to Vector Group Ltd. in its SEC filings, Liggett and Vector Tobacco are required to make payments under the MSA to the extent such companies’ market shares exceed approximately 1.65% and approximately 0.28%, respectively, of the U.S. cigarette market (with the MSA payment obligations based on each respective company’s incremental market share above the aforementioned minimum thresholds). Vector Group Ltd.’s core brands include , Eagle 20’s, Grand Prix and , all of which are in the discount segment.

Industry Market Share

The following table sets forth the approximate comparative market share positions of the leading producers of cigarettes in the U.S. tobacco industry. Lorillard is included for historical comparison. Individual domestic manufacturers’ market shares presented below are derived from the publicly available documents of the respective manufacturers and, as a result of differing methodologies used by the manufacturers to calculate market share, may not be accurate.

(Remainder of Page Intentionally Left Blank)

282 Manufacturers’ Domestic Market Share of Cigarettes1

Calendar Year

Manufacturer 2012 2013 2014 2015 2016 2017 2018 2019 Philip Morris 49.8% 50.7% 50.9% 51.3% 51.4% 50.7% 50.1% 49.7% Reynolds Tobacco2 26.5 26.0 26.5 32.0 32.3 34.7 34.5 34.8 Imperial Tobacco3 ------9.5 9.2 8.7 8.7 8.8 Lorillard4 14.4 14.9 15.1 ------Other5 9.3 8.4 7.5 7.2 7.1 5.9 6.7 6.7 ______1 Aggregate market share as reported above is different from that used in the Tobacco Settlement Revenues Projection Methodology and Assumptions. In addition, aggregate market share for a given year is as reported in SEC filings for such year and has not been restated due to changes in reporting for subsequent years, if any, or otherwise. Shipments to retail outlets as reported by MSAI do not reflect actual consumer sales and do not track all volume and trade channels, and accordingly, the data may overstate or understate actual market share. 2 Reynolds Tobacco’s market share for 2014 and prior years is based on market share information prior to the merger with Lorillard. Reynolds Tobacco’s 2015 market share assumes that cigarette brands acquired in the merger were part of Reynolds Tobacco’s portfolio for the entire period, and also reflects for that entire period the divestiture of assets to Imperial Tobacco. Data for calendar years 2017 onward is as reported by BAT. 3 As of fiscal year-end September 30. According to Imperial Tobacco’s annual report for its fiscal year ended September 30, 2015, the 2015 amount shown reflects the combined performance of U.S. operations before and after the acquisition of the above-described assets of Reynolds Tobacco and Lorillard, which occurred in such fiscal year. For fiscal years 2014 and prior, Imperial Tobacco is included in “Other.” 4 Lorillard utilized MSAI market share data in its SEC reports. MSAI divides the cigarette market into two price segments, the premium price segment and the discount or reduced price segment. MSAI’s information relating to unit sales volume and market share of certain of the smaller, primarily deep discount, cigarette manufacturers is based on estimates derived by MSAI. 5 The market share specified in “Other” has been determined by subtracting the total market share percentages of Philip Morris, Reynolds Tobacco, Imperial Tobacco and Lorillard, as reported in their publicly available documents, from 100%. Results may not be accurate and may not total 100% due to rounding and the differing sources and methodologies utilized to calculate market share.

Cigarette Shipment Trends

According to NAAG data, U.S. cigarette shipments over the past 10 reported sales years were approximately as set forth in the table below.

NAAG-Reported U.S. Cigarette Shipments 2010-2019 Overall No. of OPM No. of Cigarettes % Change From Cigarettes % Change From (in billions) (with Prior Year (with (in billions) (with Prior Year (with 0.0325 oz. RYO 0.0325 oz. RYO 0.0325 oz. RYO 0.0325 oz. RYO Sales Year conversion) conversion)1 conversion) conversion)1 2019 225.130 (4.98)% 183.169 (7.08)% 2018 236.922 (4.76) 197.132 (5.94) 2017 248.767 (4.47) 209.584 (5.09) 2016 260.411 (4.07) 220.818 (2.40) 2015 271.452 2.00 226.214 (0.14) 2014 266.122 (3.73) 226.553 (3.53) 2013 276.423 (4.85) 234.841 (4.34) 2012 290.520 (1.90) 245.486 (1.99) 2011 296.159 (2.75) 250.461 (3.09) 2010 304.547 (6.36) 258.440 (3.96) ______1 Percentage change calculated after rounding of shipment volume.

283 According to data from the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau (the “TTB”), the overall quantity of cigarettes shipped domestically (not including a conversion for roll-your-own tobacco) for the past 10 reported calendar years was approximately as set forth in the table below.

TTB-Reported Quantity of Cigarettes Shipped Domestically 2010-2019 Calendar No. of Cigarettes Percent Change Year (in billions) From Prior Year1 2019 223.432 (5.05)% 2018 235.321 (4.79) 2017 247.162 (4.00) 2016 257.453 (4.03) 2015 268.261 2.10 2014 262.736 (4.04) 2013 273.787 (4.67) 2012 287.187 (1.91) 2011 292.769 (2.57) 2010 300.489 (5.52) ______1 Percentage change calculated after rounding of shipment volume.

According to Altria in its Form 10-K filed with the SEC for the calendar year 2019, when adjusted for certain factors, total domestic cigarette industry volumes declined by an estimated 5.5% in 2019, compared to 4.5% in 2018. When adjusted for trade inventory movements and other factors, total domestic cigarette industry volumes for the three months ended June 30, 2020 were unchanged versus the prior year, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

The MSA payments are calculated in large part on shipments by the OPMs in or to the U.S., rather than total industry shipments (as shown in the tables above), and rather than consumption. The information in the foregoing tables, which has been obtained from publicly available documents but has not been verified by the Agency, may differ materially from the amounts used by the MSA Auditor for calculating Annual Payments under the MSA.

Physical Plant, Raw Materials, Distribution and Competition

The production facilities of the OPMs tend to be highly concentrated. Material damage to these facilities could materially affect overall cigarette production. A prolonged interruption in the manufacturing operations of the cigarette manufacturers could have a material adverse effect on the ability of the cigarette manufacturers to effectively operate their respective businesses. In March 2020, Altria’s tobacco businesses temporarily suspended operations at several of their manufacturing facilities, including Philip Morris’s manufacturing facility in Richmond, Virginia (the primary facility for manufacturing Philip Morris cigarettes), as a result of the COVID-19 pandemic described herein. Operations resumed under enhanced safety protocols in April 2020, and all of Altria’s tobacco manufacturing facilities are operational, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. In addition, shifts in crops (such as those driven by economic conditions and adverse weather patterns), government mandated prices, economic trade sanctions, geopolitical instability, production control programs and access to raw materials may increase or decrease the cost or reduce the supply or quality of tobacco and other agricultural products or machinery and related materials used to manufacture tobacco products. Any significant change in the price, quality or availability of tobacco leaf or other agricultural products or other raw materials or component parts used to manufacture tobacco products could restrict the cigarette manufacturers’ ability to continue marketing existing products.

Cigarette manufacturers sell tobacco products to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services. However, certain stores have ceased the sale of tobacco products. The retail chain store Target reportedly stopped selling tobacco products in 1996. In September 2014, the national pharmacy chain CVS reportedly stopped selling all cigarettes and other tobacco products in all its stores

284 (following a February 2014 announcement), citing that such sales were inconsistent with its mission. CVS recently reported that a year after it stopped selling cigarettes, cigarette sales across all retailers have dropped in 13 states where it has sizable market share. A group of state attorneys general have pressured large retail stores with pharmacies to take similar action, and in April 2014 several members of Congress called on these retailers to stop selling cigarettes and other items containing tobacco. According to the ANRF, as of August 15, 2020, two states (Massachusetts and New York) and 242 cities and counties, located principally in California and Massachusetts, have tobacco-free pharmacy laws. In addition, Costco has also reportedly removed tobacco products from a majority of its U.S. locations, according to news reports in March 2016. The Walgreens drugstore chain announced in April 2019 that, effective September 1, 2019, it would require customers to be at least 21 years old to purchase tobacco in any of its more than 9,500 stores nationwide. On May 8, 2019, Walmart announced that, beginning July 1, 2019, all Walmart and Sam’s Club stores would raise the minimum age to purchase tobacco products, including all e-cigarettes, to 21, and would discontinue the sale of fruit- and dessert-flavored electronic nicotine delivery systems. Furthermore, certain municipalities have enacted laws limiting the number or density of cigarette retailers. For example, in 2014, San Francisco’s Tobacco Use Reduction Act was passed, which sets a cap on the number of tobacco retailers in each supervisory district and prohibits new stores from locating within 500 feet of schools or within 500 feet of another existing tobacco retailer. In 2016, Philadelphia’s Retailer Reduction Regulations were passed, setting a cap on the number of tobacco retailers allowed at one per 1,000 persons in each planning district and restricting any new retailer from locating within 500 feet of K-12 schools. In August 2017, New York City updated its comprehensive point-of- sale regulations, to, among other things, set a city-wide cap on retailer licenses at half of the current number in each district.

Cigarette manufacturers and their affiliates and licensees also market cigarettes and other tobacco products worldwide, directly or through sales organizations and other entities with which they have contractual arrangements.

The domestic market for cigarettes is highly competitive. Competition is primarily based on a brand’s price, including the level of discounting and other promotional activities, positioning, product attributes and packaging, consumer loyalty, advertising, retail display, quality and taste. Promotional activities include, in certain instances, allowances, the distribution of incentive items, price reductions and other discounts. Considerable marketing support, merchandising display and competitive pricing are generally necessary to maintain or improve a brand’s market position. Increased selling prices and taxes on cigarettes have resulted in additional price sensitivity of cigarettes at the consumer level and in a proliferation of discounts and of brands in the discount segment of the market. According to the Tobacco Consumption Report, premium brands are typically $1.00 to $2.00 more expensive per pack than discount brands, allowing a margin for consumers to switch to less costly discount brands in the event of price increases.

The tobacco products of the cigarette manufacturers and their affiliates and licensees are advertised and promoted through various media, although television and radio advertising of cigarettes is prohibited in the U.S. The domestic tobacco manufacturers have agreed to additional marketing restrictions in the U.S. as part of the MSA and other settlement agreements. They are still permitted, however, to conduct advertising campaigns in magazines, at retail cigarette locations, in direct mail campaigns targeted at adult smokers, and in other adult media.

E-Cigarettes and Vapor Products

Numerous manufacturers have recently developed (or acquired) and are marketing “electronic cigarettes” (or “e-cigarettes”), which, while not tobacco products, are battery powered devices in the shape of a cigarette that vaporize liquid nicotine, which is then inhaled by the consumer. Because they do not contain or burn or heat tobacco, the manufacturers (and certain states) do not deem e-cigarettes to constitute “cigarettes” within the meaning of the MSA. Electronic nicotine products also include devices called “vaporizers,” which are larger, customizable devices. They have larger batteries and cartridges, hold more liquid, produce larger vapor clouds and last longer. They allow users to mix and match hardware and refill cartridges with liquid bought in bulk, so that they generally are cheaper than e- cigarettes. As discussed below, in May 2016, the U.S. Food and Drug Administration (“FDA”) released its final rule which subjects manufacturers, importers and/or retailers of e-cigarettes, other vapor products and certain other tobacco related products to the same and additional regulations applicable to cigarettes, cigarette tobacco, roll-your-own tobacco and smokeless tobacco. However, e-cigarettes and vapor products are currently not subject to the advertising restrictions to which tobacco products are subject. According to research cited by the Campaign for Tobacco-Free

285 Kids, in 2017 there were more than 430 brands of e-cigarettes, and over 15,500 unique e-cigarette flavors were available online.

According to news reports, growth of e-cigarette use increased dramatically in 2017 and 2018, led by sales of the JUUL brand. JUUL is an e-cigarette shaped like a USB flash drive, which heats a nicotine-containing liquid to produce an aerosol that is inhaled. No single e-cigarette manufacturer dominated the U.S. market through 2013. However, sales of BAT’s e-cigarette devices surged 146% during 2014 and led the market well into 2017. During 2016-2017, Juul Labs, Inc.’s sales increased 641 percent — from 2.2 million JUUL devices sold in 2016 to 16.2 million devices sold in 2017. By December of 2017, Juul Labs, Inc.’s sales comprised nearly 1 in 3 e-cigarette sales nationally, giving it the largest market share in the United States. According to a CDC release dated October 2, 2018, based on an analysis of retail sales data from 2013-2017, sales of JUUL grew more than seven-fold from 2016 to 2017, and held the greatest share of the U.S. e-cigarette market by December 2017. According to Altria, in December 2018, Altria, through a wholly-owned subsidiary, purchased shares of non-voting convertible common stock of Juul Labs, Inc., representing a 35% economic interest, for $12.8 billion (Altria’s economic interest in Juul Labs, Inc. remained at 35% at June 30, 2020, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020). Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that during 2019, Altria recorded total pre-tax impairment charges of $8.6 billion related to its Juul Labs, Inc. investment, resulting in a $4.2 billion carrying value of such investment at December 31, 2019, with no additional impairment at June 30, 2020. On April 1, 2020, the FTC filed an administrative complaint alleging that Altria’s acquisition of a 35% economic interest in Juul Labs, Inc. eliminated competition in violation of federal antitrust laws; see “—Industry Overview” above.

The parent companies of each of the OPMs have launched e-cigarette brands. Altria introduced e-vapor products through its subsidiary Nu Mark LLC under the “MarkTen” brand in 2013, but according to Altria in its SEC filings, in December 2018, Altria refocused its innovative product efforts, which included the discontinuation of production and distribution of all e-vapor products by Nu Mark LLC, and the purchase of its 35% economic interest in Juul Labs, Inc., as described above. As discussed above under “—Industry Overview,” on May 22, 2018, Altria announced the creation of a separate division within Altria for innovative, non-combustible, reduced-risk products such as vapor products and reported that the new structure is expected, among other things, to accelerate innovation. Reynolds American markets the e-cigarette product and introduced its VUSE Fob power unit, which offers an on-device display with information about battery and cartridge levels, in March 2016, and began national distribution of its VUSE Vibe high-volume cartridge and closed-tank system, with a stronger and longer-lasting battery, in November 2016. In April 2012 Lorillard, Inc. acquired the blu eCigs brand, which it sold to Imperial Tobacco contemporaneously with the Lorillard, Inc. merger into Reynolds American in 2015. In May 2018, Imperial Tobacco introduced to the Canadian market its vapor product Vype, a fillable e-cigarette that produces an inhalable aerosol, comes in a number of flavors and is available with various levels of nicotine, including one with no nicotine. In addition, Vector Group Ltd.’s subsidiary Zoom E-Cigs LLC rolled out its Zoom e-cigarette brand nationally in 2014. Other manufacturers also have e-cigarette brands on the market.

E-cigarette and vapor product sales were an estimated $3.5 billion in 2015 and $4 billion in 2016, according to news reports, and estimated at $6 billion for 2018 and projected to reach $9 billion for 2019, according to research cited by Campaign for Tobacco-Free Kids. According to the Tobacco Consumption Report, 2018 sales of electronic cigarettes in the U.S. were estimated at over $7 billion, with rapid growth in the past two years, led by sales of the JUUL brand, which is now the most popular electronic cigarette accounting for approximately three-fourths of the market share. Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that its subsidiaries believe that a significant number of adult tobacco consumers switch among tobacco categories, use multiple forms of tobacco products and try innovative tobacco products, such as e-vapor products and oral nicotine pouches. In addition, Altria stated that a growing number of adult smokers are converting from cigarettes to exclusive use of non-combustible tobacco product alternatives, that up until the second half of 2019 the e-vapor category had experienced significant growth in recent years, and that the number of adults who exclusively use e-vapor products also increased during that time which, along with growth in oral nicotine pouches, negatively impacted consumption levels and sales volume of cigarettes. Altria noted in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that growth in the e-vapor category has been negatively impacted by legislative and regulatory activities. Altria and its tobacco subsidiaries believe that the innovative tobacco product categories will continue to be dynamic as adult tobacco consumers explore a variety of tobacco product options and as the regulatory environment for these

286 innovative tobacco products evolves, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

According to a CDC report published November 9, 2018, in 2017 2.8% of adults were current e-cigarette users. The CDC in September 2014 reported results of a survey that indicated that in 2013 approximately 8.5% of the adult population, and 36.5% of smokers, had tried e-cigarettes at some time. According to the Tobacco Consumption Report, a survey in 2019 reported that the prevalence of self-reported, current e-cigarette use was 27.5% among high school students and 10.5% among middle school students. According to an article in the February 2019 CDC Morbidity and Mortality Weekly Report, current e-cigarette use among high school students had increased to 20.8% in 2018 from 1.5% in 2011, and had increased by 78% (from 11.7% to 20.8%) during 2017–2018 alone. According to the same report, e-cigarettes were the most commonly used tobacco product among high school students (20.8%), followed by cigarettes (8.1%), and among middle school students, the most commonly used tobacco product was e- cigarettes (4.9%), followed by cigarettes (1.8%). In January 2016 the CDC reported that in 2014 approximately 2.4 million middle and high school students had used electronic cigarettes in the preceding 30 days. The CDC in June 2016 released survey results showing that 45% of high school students had tried e-cigarettes in 2015, compared with only 32% who had tried cigarettes. In December 2014 the University of Michigan’s Survey for Research Center (“UMSRC”) reported its findings that e-cigarette use exceeded traditional cigarette smoking among teens in 2014. In December 2015, the UMSRC reported its findings that in 2015, a substantially higher percentage of adolescents used e-cigarettes in the last 30 days than had smoked regular cigarettes and that cigarette smoking among teens continued a decades-long decline in 2015 and reached the lowest levels recorded since annual tracking began over 40 years ago. The National Health Survey of the CDC reported that in 2016, 15.4% of adults had tried e-cigarettes, and 3.2% were current users. In addition, it has been reported that increases in taxes on traditional cigarettes have caused an increase in the sale of e-cigarettes. According to the Tobacco Consumption Report, certain sources have shown that e-cigarette use is associated with quit attempts by smokers; that youth use of e-cigarettes is unlikely to increase the number of future cigarette smokers; and that the substantial increase in e-cigarette use among U.S. adult smokers this decade was associated with a statistically significant increase in the smoking cessation rate at the population level; however, the Tobacco Consumption Report cites two studies published in 2019 that found that teens who use e-cigarettes or other tobacco-related products are more likely to later initiate cigarette use.

On May 5, 2016, the FDA released final rules that extend its regulatory authority to electronic cigarettes and certain other tobacco products under the FSPTCA (following an April 25, 2014 release of proposed rules). The rules ban sales of e-cigarettes and other vapor products, cigars, hookah tobacco, pipe tobacco, oral tobacco-derived nicotine products and other products to people under 18, effective August 2016. The rules also require new health warnings for these products, and manufacturers must seek FDA permission to continue marketing all such products launched since 2007 (comprising virtually all of the market), as discussed below under “—Regulatory Issues—FSPTCA.” In addition, the rules require that product manufacturers register with the FDA and report product and ingredient listings; only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; not distribute free samples; and not sell products in vending machines, unless in a facility that never admits youth. The rules do not restrict flavored products, online sales or advertising for e-cigarettes and vapor products. The FDA considered banning flavors of e-cigarettes and other vapor products, but comments from President Trump in November 2019 suggested that the administration may not pursue such a ban, and on January 2, 2020, the FDA announced that while it was not banning the sale of flavored e- cigarettes and other vapor products, it would prioritize flavored products in its enforcement efforts against illegally marketed e-cigarettes and other vapor products, as discussed below under “—Regulatory Issues—FSPTCA”. Various manufacturers have sued the FDA over the final rules. As part of the FDA’s comprehensive plan for tobacco and nicotine regulation discussed below under “—Regulatory Issues—FSPTCA,” in March 2018 the FDA announced that it is considering over-the-counter regulation of e-cigarettes and in April 2018 the FDA announced a Youth Tobacco Prevention Plan focused on stopping the use by youth of tobacco products, particularly e-cigarettes. As part of the Youth Tobacco Prevention Plan, the FDA conducted a large-scale, undercover nationwide blitz to crack down on the sale of e-cigarettes – specifically JUUL products – to minors at both brick-and-mortar and online retailers, and sent an official request for information directly to Juul Labs, Inc., requiring the company to submit certain documents to better understand the reportedly high rates of youth use and the particular youth appeal of these products. Moreover, in September 2019, the FDA issued a warning letter to Juul Labs, Inc. for marketing unauthorized modified risk tobacco products by engaging in labeling, advertising, and/or other activities directed to consumers. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, JUUL ceased its sales of all

287 cartridge-based, flavored e-vapor products (other than tobacco and menthol) in 2019. On December 20, 2019, the President of the United States signed legislation, effective January 1, 2020, banning the sale of e-cigarettes and other vapor products (along with tobacco products) to anyone under the age of 21. See also “—Heat-Not-Burn Tobacco Products” below.

On March 2, 2016, the U.S. Department of Transportation announced a final rule that explicitly bans the use of e-cigarettes and other vaping devices on commercial flights and applies to all scheduled flights of U.S. and foreign carriers involving transportation in, to, and from the U.S.; the U.S. Court of Appeals District of Columbia Circuit upheld the rule in July 2017. On January 28, 2016, President Obama signed the Child Prevention Act into law which requires containers for liquid nicotine used in e-cigarettes to have child-proof packaging.

Electronic cigarettes are currently not subject to federal excise taxes. For a description of state taxes imposed on vapor products, see “—Regulatory Issues—Excise Taxes” below.

According to the Tobacco Consumption Report, in October 2019, a bill to limit the amount of nicotine in e- cigarette products was introduced in the U.S. House of Representatives. The bill would restrict nicotine content to a maximum of 20 milligrams per milliliter and would give the FDA the authority to reduce the cap if necessary. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, Massachusetts passed legislation capping the amount of nicotine in vapor products, and similar legislation is pending in three other states.

Certain legislation has been passed by states and localities restricting the use and sale of electronic cigarettes and other vapor products. According to ANRF, as of August 15, 2020, 22 U.S. states and territories and 970 municipalities have banned the use of e-cigarettes in smoke-free venues, and 13 states and territories and 709 municipalities have restricted e-cigarette use in other venues. On December 19, 2013, the New York City Council approved legislation that prohibits the use of e-cigarettes in indoor public places and in places of employment (where smoking of traditional cigarettes is prohibited), and on January 3, 2017 a New York appellate panel affirmed the constitutionality of the ban. Chicago, Los Angeles, San Francisco and Philadelphia passed similar legislation in 2014. In June 2019, San Francisco’s Board of Supervisors voted to ban the sale and distribution of e-cigarettes in San Francisco. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the governors of eight states exercised executive action to temporarily prohibit either the sale of all e-vapor products or e-vapor products with flavors other than tobacco; some of those executive actions have been challenged in the courts and many of those executive actions have expired. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, 16 states and the District of Columbia have proposed legislation to ban flavors in one or more tobacco products, including vapor products, oral nicotine pouches and cigarettes, and four states, Massachusetts, New Jersey, Utah and New York, have passed such legislation. In November 2019, Massachusetts banned the sale of all flavored tobacco products, effective immediately with respect to electronic cigarettes and other vapor products. In September 2019, the Governor of Michigan directed the state health department to issue emergency rules to temporarily ban the sale of flavored vaping products. On January 21, 2020, New Jersey banned the sale of flavored vaping products, effective April 20, 2020. On February 28, 2020, the U.S. House of Representatives approved a bill banning the sale of all flavored cigarettes and e-cigarettes. In March 2020, Rhode Island banned the sale of flavored e-cigarettes (making permanent the similar emergency regulations issued in 2019). In April 2020, New York State banned the sale of vapor products in flavors other than tobacco (effective May 18, 2020). On August 28, 2020, California enacted a statute prohibiting the retail sale of all flavored tobacco products, including menthol-flavored cigarettes and e-cigarettes, which becomes effective January 1, 2021 and allowing local ordinances to be more restrictive.

In December 2014, Representatives Henry Waxman and Frank Pallone and Senator Dick Durbin sent letters to 29 Attorneys General urging them to classify e-cigarettes as cigarettes under the MSA in order to prevent e-cigarette companies from targeting youth and getting them addicted to their products. In February 2015, eight Attorneys General sent a response letter stating their position that the MSA does not cover e-cigarettes.

In September 2017, Philip Morris International announced that it would contribute approximately $80 million each year for the following 12 years to a non-profit organization called the Foundation for a Smoke-Free World, to

288 fund research on smoke-free alternatives, among other things. In addition, in January 2018, Philip Morris International announced that its long-term goal is to replace its traditional cigarettes with smoke-free alternative products.

Heat-Not-Burn Tobacco Products

Certain tobacco product manufacturers have developed alternative products in which the tobacco is electronically heated rather than burned. Philip Morris International has developed the IQOS and TEEPS heat-not- burn tobacco products, over which Altria has sole distribution rights in the United States through a licensing agreement with Philip Morris International. IQOS is the electronic device that is used with the HeatSticks heated tobacco products. BAT has developed a similar heat-not-burn tobacco product, Glo. Such products are currently sold in certain international markets, and according to the Tobacco Consumption Report, following authorization by the FDA, as described below, sales of IQOS began in the United States in October 2019 in Atlanta and November 2019 in Richmond, and Philip Morris launched IQOS in Charlotte in July 2020, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. In addition, in July 2018, BAT received approval from the FDA under the substantial equivalence application process to begin selling its Neocore heated-tobacco device, which was formerly known as Eclipse, according to the Tobacco Consumption Report. Neocore is a carbon-tipped product that is lit with a match but does not burn the tobacco. The FDA regulatory authority described under “—E-Cigarettes and Vapor Products” above extends to heat-not-burn tobacco products, and any state and local regulation on vapor products described under “—E-Cigarettes and Vapor Products” above would also extend to heat-not-burn tobacco products.

According to news reports, in December 2016 Philip Morris International filed a modified risk tobacco product application with the FDA to market IQOS in the U.S. as a “less harmful” tobacco product than traditional cigarettes. In March 2017 Philip Morris International filed the corresponding pre-market tobacco production application with the FDA, and in January 2018 an FDA advisory panel found that IQOS significantly reduces exposure to harmful or potentially harmful chemicals, but the panel rejected Philip Morris International’s claim that the product is less harmful than traditional cigarettes. On April 30, 2019, the FDA, which is not required to follow the advice of the advisory panel, announced that it had authorized the marketing of the IQOS “Tobacco Heating System” in the U.S. through the FDA’s Premarket Tobacco Application pathway (but not the modified risk pathway at that time). On July 7, 2020, the FDA approved IQOS as a “modified risk” tobacco product, which will be allowed to be marketed with “exposure modification” statements to the effect that the product significantly reduces the production of harmful and potentially harmful chemicals and that scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly reduces the body’s exposure to harmful or potentially harmful chemicals.

On April 9, 2020, BAT sued Philip Morris International for patent infringement based on the sale of IQOS in the United States, seeking remedies for damages caused and an injunction on importing IQOS into the United States. In June 2020, the defendants filed counterclaims against the plaintiffs for infringement of various patents owned by the defendants, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. Altria has stated that it considers IQOS and other products in which tobacco is heated rather than burned as “tobacco products” under the MSA.

Smokeless Tobacco Products

Smokeless tobacco products, which are not “cigarettes” within the meaning of the MSA, have been available for centuries. Chewing tobacco and snuff are the most significant components of this market segment. Snuff is a ground or powdered form of tobacco that is placed under the lip to dissolve. It delivers nicotine effectively to the body. Moist snuff, including “snus” (originated in Sweden), is both smoke-free and potentially spit-free. As cigarette consumption expanded in the last century, the use of smokeless products declined. Recently, however, the industry has expanded its smokeless tobacco products in response to the general decline in cigarette consumption, the proliferation of smoking bans and the perception that smokeless use is a less harmful mode of tobacco and nicotine usage than cigarettes. Snuff, for example, is now being marketed to adult cigarette smokers as an alternative to cigarettes. UST, the largest producer of moist smokeless tobacco (and a subsidiary of Altria, Philip Morris’s parent company), which manufactures Copenhagen and Skoal smokeless products, among others, is explicitly targeting adult smoker conversion in its growth strategy. In 2006, the OPMs entered the market of smokeless tobacco products. Reynolds American has tested dissolvable tobacco products Camel Sticks (a twisted, dissolvable stick made of

289 tobacco), Camel Orbs (dissolvable tobacco tablets) and Camel Strips (dissolvable tobacco strips), but in recent years has scaled back marketing of these products. According to Altria in its Form 10-Q filed with the SEC for the six- month period ended June 30, 2020, during the third quarter of 2019, Helix Innovations LLC, a subsidiary of Altria, acquired Burger Söhne Holding and its subsidiaries as well as certain affiliated companies that are engaged in the manufacture and sale of oral nicotine pouches under the brand name “on!”. On May 15, 2020, Altria announced that it submitted premarket tobacco product applications to the FDA for 35 on! products on behalf of Helix Innovations LLC.

As a result of these efforts, smokeless tobacco products have been increasing market share of tobacco products overall at the expense of the market share captured by cigarettes. According to a CDC report published November 9, 2018, 2.1% of U.S. adults were current users of smokeless tobacco (defined as chewing tobacco, snuff, dip, snus, or dissolvable tobacco) in 2017. According to a CDC report published December 9, 2016, per capita consumption of smokeless tobacco (defined as chewing tobacco and dry snuff) increased modestly, from 0.533 pounds in 2000 to 0.555 pounds in 2015, or 4.2%. According to Altria’s Form 10-K filed with the SEC for the calendar year 2019, smokeless products (excluding oral nicotine pouches) accounted for approximately 9.7% of Altria’s net revenues for the smokeable and smokeless products segments for the year ended December 31, 2019, compared with approximately 9.2% for 2018, and oral tobacco products (comprising the formerly named smokeless products plus oral nicotine pouches) accounted for approximately 10.1% of Altria’s net revenues for the smokeable and oral tobacco products segments for the six months ended June 30, 2020, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

For a description of federal and state taxes imposed on smokeless tobacco products, see “—Regulatory Issues—Excise Taxes” below.

On June 10, 2014, Swedish Match submitted an application to the FDA to (i) authorize under the FDA’s Premarket Tobacco Application pathway the marketing and sale of updated versions of eight of its snus products under the “General” brand name and (ii) approve the snus products as a “modified risk tobacco product” (“MRTP”) allowing the manufacturer to alter or remove certain warning labels from its packages and to make claims that its products present a lower risk than cigarettes. The FDA announced in November 2015 that it had for the first time authorized the marketing of a new tobacco product through the Premarket Tobacco Application process by granting Swedish Match’s application with respect to the marketing and sale of its snus products. In December 2016 the FDA denied Swedish Match’s request to remove one of the required warning statements for eight snus products under the “General” brand name, and the FDA provided recommendations related to Swedish Match’s other requests and provided an opportunity for Swedish Match to amend its MRTP applications. In October 2019, the FDA announced that it had authorized the marketing of eight Swedish Match snus products through the MRTP pathway, marking the first time the FDA had authorized modified risk tobacco products.

Smoking Cessation Products

A variety of smoking cessation products and services have been developed to assist individuals to quit smoking. While some studies have shown that smokers who use a smoking cessation product to help them quit smoking are more likely to relapse, other studies have shown that these products and programs are effective, and that excise taxes and smoking restrictions and related tobacco regulation drive additional expenditures to the smoking cessation market. The smoking cessation industry is broadly divided into two segments, counseling services (e.g., individual, group, or telephone), and pharmacological treatments (both prescription and over-the-counter). Several large pharmaceutical companies, including GlaxoSmithKline, Johnson & Johnson, Novartis and Pfizer are significant participants in the smoking cessation market. The FDA has approved a variety of smoking cessation products and these products include prescription medicine, such as Nicotrol, Chantix, and Zyban, as well as over-the-counter products such as skin patches, lozenges and chewing gum. Alternative therapies, such as psychotherapy and hypnosis, are also in use and available to individuals. On March 15, 2018, as part of the FDA’s comprehensive plan for tobacco and nicotine regulation discussed below under “—Regulatory Issues—FSPTCA,” the FDA announced that it is starting new work to re-evaluate and modernize its approach to the development and regulation of medicinal nicotine replacement products such as gums, patches and lozenges, and on August 3, 2018, the FDA released draft guidance aimed at supporting the development of novel, inhaled nicotine replacement therapies that could be submitted to the

290 FDA for approval as new drugs, similar to current over-the-counter pharmaceutical nicotine replacement therapy products.

According to the Tobacco Consumption Report, a CDC study released in 2019 reported that approximately 34 million American adults were current smokers in 2018, representing approximately 13.7% of the population age 18 and older, a decline from 14.0% in 2017, 15.5% in 2016, and 19.4% in 2010. It is possible that many former smokers were aided by smoking cessation products.

Regarding smoking cessation generally, the CDC in January 2017 released the results of a study of quitting smoking, which found that in 2015, 68.0% of smokers wanted to stop smoking, 55.4% had made a quit attempt in the past year, 7.4% had recently quit, 57.2% had been advised by a health professional to quit, and 31.2% had used counseling and/or medications when they tried to quit.

Private health insurance carriers have increased premiums on smokers, which often are passed on by the employer to the smoker-employee. Certain of these and other health insurance policies, including Medicaid and Medicare, cover various forms of smoking cessation treatments, making smoking cessation treatments more affordable for covered smokers.

Gray Market

A price differential (principally resulting from differing tax rates) exists between cigarettes manufactured for sale abroad and cigarettes manufactured for U.S. sale. Such differential increases as excise taxes in the U.S. are increased. Consequently, a domestic gray market has developed for cigarettes that are manufactured for sale abroad, but instead are diverted for domestic sales at substantially lower prices that compete with cigarettes manufactured for domestic sale. The U.S. federal government and all states, except Massachusetts, have enacted legislation prohibiting the sale and distribution of gray market cigarettes. Smuggling activities and other illicit trade in cigarettes can adversely affect the sale of cigarettes by PMs, and certain PMs engage in a variety of initiatives to help prevent illicit trade and have taken legal action against certain distributors and retailers who engage in such illicit trade practices.

Regulatory Issues

Regulatory Restrictions and Legislative Initiatives

The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state, federal and foreign governments. Various state governments have adopted or are considering, among other things, legislation and regulations that would increase their excise taxes on cigarettes, restrict displays and advertising of tobacco products, establish ignition propensity standards for cigarettes, raise the minimum age to possess or purchase tobacco products, ban the sale of “flavored” cigarette brands, require the disclosure of ingredients used in the manufacture of tobacco products, impose restrictions on smoking in public and private areas, and restrict the sale of tobacco products directly to consumers or other unlicensed recipients, including over the Internet. Several states charge higher health insurance premiums to state employee smokers than non-smokers, and a number of states have implemented legislation that allows employers to provide incentives to employees who do not smoke. Federal law currently allows insurance companies to charge smokers up to 50% higher premiums than non-smokers, and several large corporations are now charging smokers higher premiums.

Federal Regulation

During the past five decades, various laws affecting the cigarette industry have been enacted. Since 1966, federal law has required a warning statement on cigarette packaging. Since 1971, television and radio advertising of cigarettes has been prohibited in the U.S. Cigarette advertising in other media in the U.S. is required to include information with respect to the “tar” and nicotine yield of cigarettes, as well as a warning statement. In 1984, Congress enacted the Comprehensive Smoking Education Act. Among other things, the Comprehensive Smoking Education Act established an interagency committee on smoking and health that is charged with carrying out a program to inform the public of any dangers to human health presented by cigarette smoking; required a series of four health warnings to be printed on cigarette packages and advertising on a rotating basis; increased type size and area of the warning

291 required in cigarette advertisements; and required that cigarette manufacturers provide annually, on a confidential basis, a list of ingredients added to tobacco in the manufacture of cigarettes to the Secretary of Health and Human Services.

In 1992, the federal Alcohol, Drug Abuse, and Mental Health Administration Reorganization Act was signed into law. This act required states to adopt a law prohibiting any manufacturer, retailer, or distributor of tobacco products to sell or distribute any such product to any individual under the age of 18 and to establish a system to monitor, report and reduce the illegal sale of tobacco products to minors in order to continue receiving federal funding for mental health and drug abuse programs. Federal law prohibits smoking in scheduled passenger aircraft, and the U.S. Interstate Commerce Commission has banned smoking on buses transporting passengers interstate. Certain common carriers have imposed additional restrictions on passenger smoking. On March 31, 2010, President Obama signed into law the Prevent All Cigarette Trafficking (PACT) Act. This legislation, among other things, restricts the sale of tobacco products directly to consumers or unlicensed recipients, including over the Internet, through expanded reporting requirements, requirements for delivery and sales, and penalties.

FSPTCA

The federal Family Smoking Prevention and Tobacco Control Act of 2009 (“FSPTCA”) (amending the FDA’s Food, Drug and Cosmetics Act) (“FD&C Act”), signed by President Obama on June 22, 2009, grants the FDA authority to regulate tobacco products. Among other provisions, the FSPTCA:

• establishes a Tobacco Products Scientific Advisory Committee (“TPSAC”) to, among other things, evaluate the issues surrounding the use of menthol as a flavoring or ingredient in cigarettes;

• allows the FDA to impose a ban on the use of menthol and other flavors in cigarettes upon a finding that such a prohibition would be appropriate for the public health;

• allows the FDA to require the reduction of nicotine or any other compound in cigarettes;

• imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail;

• requires larger and more severe health warnings on cigarette packs and cartons;

• requires pre-market approval by the FDA for claims made with respect to reduced risk or reduced exposure products and bans the use of descriptors on tobacco products, such as “low tar,” “mild” and “light,” when used as descriptors of modified risk, unless expressly authorized by the FDA;

• requires the disclosure of ingredients and additives to consumers;

• allows the FDA to mandate the use of reduced risk technologies in conventional cigarettes;

• permits inconsistent state regulation of the advertising or promotion of cigarettes and eliminates the existing federal preemption of such regulation;

• allows the FDA to subject new or modified tobacco products to application and premarket review and authorization requirements (the “New Product Application Process”) if the FDA does not find them to be “substantially equivalent” to products commercially marketed as of February 15, 2007, and to deny any such new product application thus preventing the distribution and sale of any product affected by such denial; and

• grants the FDA the regulatory authority to consider and impose broad additional restrictions through a rule making process.

292 Since the passage of the FSPTCA, the FDA has taken the following actions, among others:

• established the collection of user fees from the tobacco industry;

• created and staffed the TPSAC;

• selected the Director of the Center for Tobacco Products;

• announced and began enforcing a ban on fruit, candy or clove flavored cigarettes (menthol is currently exempted from this ban);

• issued guidance on registration and product listing;

• issued final rules on tobacco marketing, including restricting access and marketing of cigarettes and smokeless tobacco products to youth;

• issued a prohibition on misleading marketing terms (“Light,” “Low,” and “Mild”) for tobacco products;

• has issued final new graphic warnings to appear on cigarette packages and in cigarette advertisements;

• required warning labels for smokeless tobacco products;

• authorized the sale and marketing of new tobacco products and rejected applications to introduce certain new tobacco products into the market;

• issued its final rule subjecting e-cigarettes, vapor products and certain other tobacco products to FDA regulation (as discussed under “—E-Cigarettes and Vapor Products” above);

• stated its intent to issue a notice of proposed rulemaking that would seek to ban menthol in combustible tobacco products; and

• issued an ANPRM in order to obtain information for consideration in developing a tobacco product standard to set the maximum nicotine level for cigarettes (on November 20, 2019, the FDA removed its nicotine reduction plan from its current regulatory agenda, although the FDA may revive the plan in the future).

Marketing Rule. As required by the FSPTCA, the FDA re-promulgated in March 2010 a wide range of advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to a United States Supreme Court ruling). This marketing rule banned the use of color and graphics in tobacco product labeling and advertising (which ban was ruled to be unenforceable, as described under “–FSPTCA Litigation” below); prohibits the sale of cigarettes and smokeless tobacco to underage persons; restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products (the FDA is currently not issuing enforcement actions with regard to this restriction, as described under “–FSPTCA Litigation” below); requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions; prohibits sampling of cigarettes and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities; prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products; prohibits the sale or distribution of items such as hats and tee shirts with tobacco brands or logos; and prohibits brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event. Except as noted above, the marketing rule took effect in June 2010.

Warnings. Pursuant to requirements of the FSPTCA, the FDA issued a proposed rule in November 2010 to modify the required warnings that appear on cigarette packages and in cigarette advertisements. The proposed new

293 warnings consisted of nine new textual warning statements accompanied by color pictures depicting the negative health consequences of smoking. The FDA took public comments on the proposed rule through January 2011, and in June 2011, the FDA unveiled nine new graphic health warnings that were required to appear on cigarette packages and advertisements no later than September 2012. As discussed below under “–FSPTCA Litigation,” five tobacco companies in August 2011 filed a complaint against the FDA challenging the FDA’s rule, and the district court enjoined the FDA from enforcing the rule. In a March 5, 2019 Memorandum and Order, a federal court directed the FDA to submit by March 15, 2020 a final rule mandating color graphic warnings on cigarette packs and in cigarette advertisements as required by the FSPTCA. On March 17, 2020, the FDA issued a final rule to require new health warnings on cigarette packages and in cigarette advertisements. The warnings feature textual statements with photo- realistic color images depicting some of the lesser-known but serious health risks of cigarette smoking. Beginning October 16, 2021, the new cigarette health warnings will be required to appear prominently on cigarette packages and in advertisements, occupying the top 50% of the area of the front and rear panels of cigarette packages and at least 20% of the area at the top of cigarette advertisements. Once implemented, the new warnings must be randomly and equally displayed and distributed on cigarette packages and rotated quarterly in cigarette advertisements. The final cigarette health warnings each consist of one of the following 11 textual warning statements (each beginning with “WARNING:”) paired with an accompanying photo-realistic image depicting the negative health consequences of smoking: “Tobacco smoke can harm your children”; “Tobacco smoke causes fatal lung disease in nonsmokers”; “Smoking causes head and neck cancer”; “Smoking causes bladder cancer, which can lead to bloody urine”; “Smoking during pregnancy stunts fetal growth”; “Smoking can cause heart disease and strokes by clogging arteries”; “Smoking causes COPD, a lung disease that can be fatal”; “Smoking reduces blood flow, which can cause erectile dysfunction”; “Smoking reduces blood flow to the limbs, which can require amputation”; “Smoking causes type 2 diabetes, which raises blood sugar”; and “Smoking causes cataracts, which can lead to blindness.”

Dissolvable Tobacco Products. In July 2010, the TPSAC conducted hearings on the impact of dissolvable tobacco products on public health. A report on these hearings was submitted to the FDA in 2011. Written comments regarding dissolvable tobacco products were submitted to the TPSAC ahead of its January 2012 meeting, at which the TPSAC continued its discussions of issues related to the nature and impact of dissolvable tobacco products on public health. The TPSAC’s final report released to the FDA in March 2012 found that dissolvable tobacco products would reduce health risks compared to smoking cigarettes, but also have the potential to increase the number of tobacco users. The TPSAC could not reach any overall judgment as to whether or not the consequence of dissolvable tobacco products would be an increase or decrease in the number of people who successfully quit smoking. In May 2016, the FDA finalized its rule extending regulatory authority to cover all tobacco products, including dissolvable tobacco products, which do not fit the definition of smokeless tobacco products. The FDA regulates the manufacture, import, packaging, labeling, advertising, promotion, sale, and distribution of all dissolvable tobacco products.

Menthol. The TPSAC and the Menthol Report Subcommittee held meetings throughout 2010 and 2011 to consider the issues surrounding the use of menthol in cigarettes. At its March 2011 meeting, TPSAC presented its report and recommendations on menthol, which included that menthol likely increases experimentation and regular smoking, menthol likely increases the likelihood and degree of addiction for youth smokers, non-white menthol smokers (particularly African-Americans) are less likely to quit smoking and are less responsive to certain cessation medications, and consumers continue to believe that smoking menthol cigarettes is less harmful than smoking non- menthol cigarettes as a result of the cigarette industry’s historical marketing. TPSAC’s overall recommendation to the FDA was that “removal of menthol cigarettes from the marketplace would benefit public health in the United States.” At the July 2011 meeting, TPSAC considered revisions to its report, and the voting members unanimously approved the final report for submission to the FDA with no change in its recommendation. On July 23, 2013, the FDA released its Independent Preliminary Scientific Evaluation of the Public Health Effects of Menthol Versus Non- menthol Cigarettes (the “Preliminary Evaluation”) for public comment, and issued an Advance Notice of Proposed Rulemaking (“ANPRM”) seeking additional information to help the FDA make informed decisions about menthol in cigarettes. The Preliminary Evaluation found that although there is little evidence to suggest menthol cigarettes are more toxic than regular cigarettes, the mint flavor of menthol masks the harshness of tobacco, which makes it easier to become addicted and harder to quit, and increases smoking initiation among youth. The FDA concluded that menthol cigarettes likely pose a public health risk above that seen with non-menthol cigarettes. During the public comment period, the FDA was to consider all comments, data and research submitted to determine what regulatory action, if any, with respect to menthol cigarettes is appropriate, including the establishment of product standards. In the meantime the FDA was to conduct and support research on the differences between menthol and non-menthol

294 cigarettes as they relate to menthol’s likely impact on smoking cessation. The FDA is allowed to rely on the TPSAC’s report but is not required to follow the TPSAC’s recommendations, and the FDA has not yet taken any final action with respect to menthol use. In a press release dated November 15, 2018, the FDA announced its intent to advance a Notice of Proposed Rulemaking that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, based on comments received from the March 2018 ANPRM. See “—Comprehensive Regulatory Plan for Tobacco and Nicotine” below for a description of the FDA’s ANPRM issued on March 20, 2018 regarding flavors, including menthol, in tobacco products. See “—FSPTCA Litigation” below for a description of litigation regarding the composition of the TPSAC and reliance upon the menthol report.

On November 8, 2013, twenty-seven jurisdictions (including the State) sent a letter to the FDA in support of a ban on menthol-flavored cigarettes. On February 28, 2020, the U.S. House of Representatives approved a bill banning the sale of all flavored cigarettes and e-cigarettes. Any ban or material limitation on the use of menthol in cigarettes could materially adversely affect the results of operations, cash flow and financial condition of the PMs, especially with respect to the Newport brand mentholated cigarettes, which is owned by BAT through its subsidiary Reynolds American (following the Reynolds American merger with Lorillard, Inc.). According to research published in Nicotine and Tobacco Research in May 2018, the menthol cigarette market share increased from 30.2% in 2011 to 32.5% in 2015. News reports have estimated the 2018 market share of menthol cigarettes at 35%.

Pre-Market Review for New and Modified Products. The FSPTCA imposes restrictions on marketing new and modified tobacco products, requiring FDA review in order for a manufacturer to begin marketing a new product or continue marketing a modified product. Unless a manufacturer can demonstrate that its products are “substantially equivalent” to products commercially marketed as of February 15, 2007, the FDA could require the removal of such products or subject them to the new product application process and, if any such new product applications are denied, prevent the continued distribution and sale of such products. Manufacturers intending to first introduce new and modified cigarette, cigarette tobacco and smokeless tobacco products into the market after March 22, 2011 or intending to first introduce other new and modified products such as e-cigarettes and other vapor products into the market after August 8, 2016 must submit substantial equivalence reports to the FDA and obtain “substantial equivalence orders” from the FDA, or submit new tobacco product applications to the FDA and obtain “new tobacco product marketing orders” from the FDA before introducing the products into the market. According to the FDA, new tobacco product applications must demonstrate with scientific data that the product is appropriate for the protection of the public health. In June 2019, the FDA issued guidance on the content of new tobacco product applications for e-vapor products and in September 2019, the FDA issued a proposed rule in which it set forth proposed requirements for content, format and FDA’s procedures for reviewing such applications.

According to FDA guidance issued in January 2011, for cigarettes, cigarette tobacco and smokeless tobacco products modified or first introduced into the market between February 15, 2007 and March 22, 2011 for which a manufacturer submitted substantial equivalence reports that the FDA determines are not “substantially equivalent” to products commercially marketed as of February 15, 2007, the FDA could require the removal of such products from the marketplace. In its May 2016 final rule on e-cigarettes and other vapor products, the FDA left the “grandfather” date of February 15, 2007 in place for e-cigarettes and vapor products. For e-cigarettes and other vapor products modified or first introduced into the market between February 15, 2007 and August 8, 2016, if a manufacturer submits substantial equivalence reports for products that the FDA determines are not “substantially equivalent” to products commercially marketed as of February 15, 2007, or rejects a new tobacco product application submitted by a manufacturer, the FDA could require the removal of such products from the marketplace. Few, if any, e-cigarettes and other vapor products were on the market as of February 15, 2007, and thousands of such products subsequently entered into commerce; therefore, manufacturers of these products may not be able to file substantial equivalence reports and would be required to file new tobacco product applications demonstrating that the marketing of the products would be appropriate for the protection of the public health. To address this issue, the FDA established a compliance policy regarding its premarket review requirements for all products (such as e-cigarettes and other vapor products) deemed by the May 2016 final rule to be tobacco products that are not grandfathered products but were on the market as of August 8, 2016. The FDA will allow such products to remain on the market so long as the manufacturer has filed the appropriate Premarket Tobacco Application (“PMTA”) by a specific deadline. In August 2017 in a “Guidance for Industry” (the “August 2017 Guidance”) the FDA extended the filing deadlines for combustible non-cigarette products, such as cigars and pipe tobacco, to August 8, 2021, and for non-combustible products, such as e-cigarettes, other vapor products and oral tobacco-derived nicotine products, to August 8, 2022.

295 The August 2017 Guidance also provided that the FDA will permit manufacturers to continue to market such products that were on the market on August 8, 2016 until the FDA renders a decision on the applicable substantial equivalence report or new tobacco product application. In July 2019, the U.S. District Court for the District of Maryland ruled that the FDA had exceeded its authority in allowing e-cigarettes to remain on the market until 2022 before the manufacturers applied for regulatory approval, and ordered the FDA to adopt a 10-month deadline (May 12, 2020) for the submission of e-cigarette PMTAs (and the products whose applications are timely filed can remain on the market without being subject to FDA enforcement action for up to one year from the date of the application). On April 22, 2020 the court granted a 120-day extension (to September 9, 2020) to the e-cigarette PMTA filing deadline, on account of the COVID-19 pandemic. According to news reports, on October 11, 2019, Reynolds American submitted to the FDA a PMTA for some of its Vuse e-cigarettes.

In addition, modifications to currently-marketed products, including modifications that result from, for example, a supplier being unable to maintain the consistency required in ingredients or a manufacturer being unable to obtain the ingredients with the required specifications, can trigger the FDA’s pre-market review process described above.

In March 2015 and September 2015, the FDA issued draft guidance that announced that certain label changes and changes to the quantity of tobacco products in a package would each require submission of substantial equivalence reports and authorization from the FDA prior to marketing tobacco products with such changes, even when the tobacco product itself is not changed. As discussed under “—FSPTCA Litigation” below, in response to a legal challenge from the tobacco manufacturers, the United States District Court for the District of Columbia found that labeling changes do not require a substantial equivalence review, but product quantity changes require a substantial equivalence review. In December 2016, the FDA issued a revised final guidance document entitled, “Demonstrating the Substantial Equivalence of a New Tobacco Product: Response to Frequently Asked Questions (Edition 3)” as a result of the court decision.

Since the FSPTCA’s enactment, the FDA has received thousands of applications for products that tobacco companies claimed were “substantially equivalent” to ones already on the market. The FDA began announcing decisions on substantial equivalence reports in 2013. The FDA announced on June 25, 2013 that it approved the applications and authorized the sale of two new non-menthol Newport cigarettes that were made by Lorillard (after determining that the cigarettes, while slightly different than previous products, would not pose new health issues) and rejected four other new tobacco products, based on new health concerns raised by some ingredients and a lack of detail about product design. It was the first instance of a federal agency rejecting an application by a tobacco manufacturer to bring a new tobacco product to the market based on the product’s threat to public health. Four additional tobacco products were rejected by the FDA on August 28, 2013 because they were found to be “not substantially equivalent” to the predicate products to which they were compared, and in September 2013 four roll-your-own products were approved for marketing and sale by the FDA because the products were determined to be “substantially equivalent” to the predicate products to which they were compared. In February 2014, the FDA issued orders to prevent the further sale and distribution of four of the “not substantially equivalent” tobacco products that were currently on the market, marking the first time the FDA has used its authority to order a tobacco manufacturer to stop selling and distributing currently available tobacco products. In August 2014, the FDA ordered a tobacco product manufacturer to stop selling and distributing seven dissolvable tobacco products because they were not substantially equivalent to predicate products. On December 17, 2019, the FDA authorized the marketing of two new tobacco products manufactured by SPM 22nd Century Group Inc., Moonlight and Moonlight Menthol (formerly named VLN), which are combusted, filtered cigarettes that contain a reduced amount of nicotine compared to typical commercial cigarettes (an approximately 95% reduction). After reviewing the PMTAs submitted by the tobacco manufacturer, the FDA determined that authorizing these reduced nicotine products for sale in the U.S. is appropriate for the protection of the public health because of, among several key considerations, the potential to reduce nicotine dependence in addicted adult smokers. According to the FDA, on average, conventional cigarettes made in the U.S. contain tobacco with a nicotine content of 10 to 14 milligrams per cigarette, and Moonlight and Moonlight Menthol have nicotine content between 0.2 to 0.7 milligrams per cigarette. The FDA has not yet made a ruling on the modified risk tobacco product application for these reduced nicotine cigarettes, in which 22nd Century Group Inc. seeks to sell such products with reduced exposure claims.

296 Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that it is difficult to predict the duration of FDA reviews of substantial equivalence reports or new tobacco product applications, and a “not substantially equivalent” determination or denial of a new tobacco product application could have a material adverse impact on its business, cash flows or financial position.

As noted below under “—Comprehensive Regulatory Plan for Tobacco and Nicotine,” as part of the FDA’s comprehensive plan for tobacco and nicotine regulation, the FDA reported that it plans to develop foundational rules and guidance that will delineate key requirements of the regulatory process, such as the demonstration of substantial equivalence and the submission of applications for new tobacco products.

Modified Risk Products. The FSPTCA bans the use of descriptors on tobacco products such as “low tar,” “mild” and “light” when used as descriptors of modified risk, prohibits the alteration or removal of warning labels and prohibits the use of modified risk claims, unless expressly authorized by the FDA through the modified risk tobacco product application process. On March 30, 2012 the FDA issued draft guidance on preparing and submitting applications for modified risk tobacco products pursuant to the FSPTCA.

On August 27, 2015, the FDA sent a warning letter to Reynolds American’s subsidiary Santa Fe Natural Tobacco Company, claiming that its use of the terms “Natural” and “Additive Free” in the product labeling and advertising for cigarettes violates the modified risk tobacco products provision of the FSPTCA. The FDA stated that in order for such terms to be used, these cigarettes must have an FDA modified-risk tobacco product order, which requires scientific evidence in order to legally make those claims. Following discussions between the parties, on January 23, 2017 the FDA and Santa Fe Natural Tobacco Company reached an agreement whereby, among other things, Santa Fe Natural Tobacco Company committed to phasing out use of the terms “Natural” and “Additive Free” from product labeling and advertising for Natural American Spirit cigarettes on an established timeframe, but it may continue to use the term “Natural” in the Natural American Spirit brand name and trademarks.

In connection with a 2016 lawsuit initiated by Altria’s subsidiary John Middleton Co. (“Middleton”) the Department of Justice, on behalf of the FDA, informed Middleton that the FDA does not intend to bring an enforcement action against Middleton for the use of the term “mild” in the trademark “Black & Mild” (Middleton’s principal cigar brand), according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

As described above under “—Smokeless Tobacco Products,” in October 2019, the FDA announced that it had authorized the marketing of eight Swedish Match snus products through the modified risk tobacco product pathway, marking the first time the FDA had authorized modified risk tobacco products.

As described above under “—Heat-Not-Burn Tobacco Products,” on July 7, 2020, the FDA approved Philip Morris International’s IQOS system as a “modified risk” tobacco product, which will be allowed to be marketed with “exposure modification” statements to the effect that the product significantly reduces the production of harmful and potentially harmful chemicals and that scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly reduces the body’s exposure to harmful or potentially harmful chemicals.

As described above under “—E-Cigarettes and Vapor Products,” in September 2019, the FDA issued a warning letter to Juul Labs, Inc. for marketing unauthorized modified risk tobacco products by engaging in labeling, advertising, and/or other activities directed to consumers.

As described above under “—Pre-Market Review for New and Modified Products,” the FDA has not yet made a ruling on the modified risk tobacco product application for the reduced nicotine cigarettes of 22nd Century Group Inc.

297 Product Constituents and Product Standards. On March 30, 2012 the FDA issued draft guidance on the reporting of harmful and potentially harmful constituents in tobacco products and tobacco smoke pursuant to the FSPTCA. In January 2017, the FDA proposed a product standard for N-nitrosonornicotine (NNN) levels in finished smokeless tobacco products.

Comprehensive Regulatory Plan for Tobacco and Nicotine. On July 28, 2017, the FDA announced its intent to develop a comprehensive plan for tobacco and nicotine regulation that recognizes the continuum of risk for nicotine delivery. On March 15, 2018, as part of this comprehensive plan, the FDA announced an ANPRM to explore and seek comment on lowering the nicotine in cigarettes to minimally or non-addictive levels, but on November 20, 2019, the FDA removed its nicotine reduction plan from its current regulatory agenda (although the FDA may revive the plan in the future). On March 20, 2018, the FDA issued an additional ANPRM regarding the role that flavors, including menthol, play in initiation, use and cessation of use of tobacco products, and in a press release dated November 15, 2018, the FDA announced its intent to advance a Notice of Proposed Rulemaking that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars, based on comments received from the March 2018 ANPRM. In the March 15, 2018 announcement, the FDA also stated that it is starting new work to re- evaluate and modernize its approach to the development and regulation of medicinal nicotine replacement products such as gums, patches and lozenges; and plans to issue a series of foundational rules and guidance that will delineate key requirements of the regulatory process, such as the demonstration of substantial equivalence and the submission of applications for new tobacco products, as well as a framework for addressing substantial equivalence applications for provisional products that entered the market during applicable grace periods. The FDA also noted in the July 2017 announcement that it plans to develop product standards to protect against known public health risks such as issues with electronic nicotine delivery systems batteries and concerns about children’s exposure to liquid nicotine. On March 28, 2018, the FDA announced, as part of the comprehensive plan, that it is considering over-the-counter regulation of e-cigarettes. On April 24, 2018, the FDA announced a Youth Tobacco Prevention Plan focused on stopping the use by youth of tobacco products, particularly e-cigarettes, as part of its comprehensive plan. Among other initial actions, the FDA sent official requests for information to several e-cigarette manufacturers, requiring them to submit documents to enable the FDA to better understand the youth appeal of e-cigarettes, and conducted an undercover nationwide blitz to crack down on illicit sales of e-cigarettes. The Youth Tobacco Prevention Plan will also include efforts to make tobacco products less toxic, appealing and addictive in order to deter use by youth, which may include measures on flavors or designs that appeal to youth, child-resistant packaging and product labeling to prevent accidental child exposure to liquid nicotine. Additionally, the FDA plans to explore additional restrictions on the sale and promotion of electronic nicotine delivery systems to further reduce youth exposure and access to these products. On August 3, 2018, the FDA released draft guidance aimed at supporting the development of novel, inhaled nicotine replacement therapies that could be submitted to the FDA for approval as new drugs, similar to current over- the-counter pharmaceutical nicotine replacement therapy products.

FDA March 2019 Draft Guidance. In March 2019 the FDA issued a draft Guidance for Industry entitled “Modifications to Compliance Policy for Certain Deemed Tobacco Products” (the “March 2019 Draft Guidance”). The March 2019 Draft Guidance proposed, among other things, to revise the FDA compliance policy for flavored e- vapor products by, among other things, moving the deadline for filing e-vapor product pre-market applications from August 2022 to August 2021 (however, as described above, the U.S. District Court for the District of Maryland ordered a May 12, 2020 deadline for the submission of e-vapor product PMTAs, which the court extended to September 9, 2020 on account of the COVID-19 pandemic), and imposing restrictions on sales of flavored vapor products at in- person locations and online in order to reduce underage access. In the March 2019 Draft Guidance, the FDA also announced its intention to restrict certain flavors of e-vapor products in order to deter underage usage of such products. In September 2019, the United States Department of Health and Human Services announced that the FDA’s compliance policy for flavored e-vapor products will be broader than that announced in the March 2019 Draft Guidance by including both mint and menthol flavored e-vapor products as the subject of any FDA enforcement; however, comments from President Trump in November 2019 suggested that the administration may not pursue a ban of flavored e-vapor products, and on January 2, 2020, the FDA announced that while it was not banning the sale of flavored e-cigarettes and other vapor products, it would prioritize flavored products in its enforcement efforts against illegally marketed e-cigarettes and other vapor products. The March 2019 Draft Guidance was subject to a 30-day comment period, after which the FDA may issue a final guidance. According to the March 2019 Draft Guidance, enforcement actions under the revised policies would begin 30 days after the issuance of the final guidance.

298 User Fees. The FSPTCA imposes quarterly user fees on cigarette, cigarette tobacco, smokeless tobacco, cigar and pipe tobacco manufacturers and importers to pay for the cost of regulation and other matters. The FSPTCA does not impose user fees on vapor product manufacturers. The cost of the FDA user fees is allocated first among tobacco product categories subject to FDA regulation and then among manufacturers and importers within each respective category based on their relative market shares, all as prescribed by the FSPTCA and FDA regulations. Payments for user fees are adjusted for several factors, including inflation, market share and industry volume.

Future Actions. The FDA can issue additional regulations under the FSPTCA to impose broad additional restrictions on tobacco products. In addition, the FSPTCA requires that the FDA promulgate good manufacturing practice regulations for tobacco product manufacturers, but does not specify a timeframe for such regulations.

President Trump’s budget plan released February 10, 2020 proposed to move the Center for Tobacco Products out of the FDA and to create a new agency within the U.S. Department of Health and Human Services to focus on tobacco regulation, which, according to the Trump administration, would have greater capacity to respond strategically to the growing complexity of new tobacco products.

FSPTCA Litigation

Tobacco manufacturers have filed suit regarding certain provisions of the FSPTCA and actions taken thereunder. In August 2009, a group of tobacco manufacturers (including Reynolds Tobacco and Lorillard) and a tobacco retailer filed a complaint against the U.S. government in the U.S. District Court for the Western District of Kentucky, Commonwealth Brands, Inc. v. U.S., in which they asserted that various provisions of the FSPTCA violate their free speech rights under the First Amendment, constitute an unlawful taking under the Fifth Amendment, and are an infringement on their Fifth Amendment due process rights. Plaintiffs sought a preliminary injunction and a judgment declaring the challenged provisions unconstitutional. Both plaintiffs and the government filed motions for summary judgment and on November 5, 2009, the district court denied certain plaintiffs’ motion for preliminary injunction as to the modified risk tobacco products provision of the FSPTCA and in January 2010 granted partial summary judgment to plaintiffs on their claims that the ban on color and graphics in advertising and the ban on statements implying that tobacco products are safer due to FDA regulation violated their First Amendment speech rights. The district court granted partial summary judgment to the government on all other claims. Both parties appealed from the district court’s order and on March 19, 2012, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court’s decision upholding the FSPTCA’s restrictions on the marketing of modified-risk tobacco products, the FSPTCA’s bans on event sponsorship, branding non-tobacco merchandise, and free sampling, and the requirement that tobacco manufacturers reserve significant packaging space for textual health warnings. The Sixth Circuit further affirmed the district court’s grant of summary judgment to plaintiff manufacturers on the unconstitutionality of the FSPTCA’s restriction of tobacco advertising to black and white text. The Sixth Circuit reversed the district court’s determination that the FSPTCA’s restriction on statements regarding the relative safety of tobacco products based on FDA regulation is unconstitutional and its determination that the FSPTCA’s ban on tobacco continuity programs is permissible under the First Amendment. On May 31, 2012, the Sixth Circuit denied the plaintiffs’ motion for rehearing en banc. On October 30, 2012, the plaintiffs filed a petition for writ of certiorari with the U.S. Supreme Court. On April 22, 2013, the U.S. Supreme Court denied plaintiffs’ petition for certiorari. The government had not appealed the portion of the Court of Appeals ruling that affirmed the unconstitutionality of the FSPTCA’s restriction of tobacco advertising to black and white text.

In a separate lawsuit that challenged the constitutionality of the FDA regulation that restricts tobacco manufacturers from using the trade or brand name of a non-tobacco product on cigarettes or smokeless tobacco products, the case was dismissed without prejudice pursuant to a stipulation by which the FDA agreed not to enforce the current or any amended trade name rule against plaintiffs until at least 180 days after rulemaking on the amended rule concludes. This relief only applies to plaintiffs in the case. However, in May 2010, the FDA issued guidance on the use of non-tobacco trade and brand names applicable to all cigarette and smokeless tobacco product manufacturers. This guidance indicated the FDA’s intention not to commence enforcement actions under the regulation while it considers how to address the concerns raised by various manufacturers.

In February 2011, Lorillard, along with Reynolds Tobacco, filed a lawsuit in the U.S. District Court for the District of Columbia, Lorillard, Inc. v. U.S. Food and Drug Administration, against the FDA challenging the

299 composition of the TPSAC because of the FDA’s appointment of certain voting members with significant financial conflicts of interest. Lorillard believed these members were financially biased because they regularly testify as expert witnesses against tobacco-product manufacturers, and because they are paid consultants for pharmaceutical companies that develop and market smoking-cessation products. The suit similarly challenged the presence of certain conflicted individuals on the Constituents Subcommittee of the TPSAC. The complaint sought a judgment (i) declaring that, among other things, the appointment of the conflicted individuals to the TPSAC (and its Constituents Subcommittee) was arbitrary, capricious, an abuse of discretion, and otherwise not in compliance with the law because it prevented the TPSAC from preparing a report that was unbiased and untainted by conflicts of interest, and (ii) enjoining the FDA from, among other things, relying on the TPSAC’s report. On July 21, 2014, the U.S. District Court for the District of Columbia granted plaintiffs’ summary judgment motion, in part, and denied defendants’ summary judgment motion, finding that three of the panel’s members had conflicts of interest that biased them against the tobacco industry and that “the FDA’s appointment of those members was arbitrary and capricious, in violation of the APA, and fatally tainted the composition of the TPSAC and its work product, including the Menthol Report.” The court ordered the FDA to reconstitute the TPSAC so that it complies with the applicable ethics laws and barred the FDA from relying on the TPSAC 2011 report on menthol, which the court found to be, “at a minimum suspect, and at worst untrustworthy.” The FDA appealed the district court’s decision to the U.S. Court of Appeals for the District of Columbia in September 2014. On March 5, 2015, the FDA announced the resignation or termination of four members from the TPSAC and the addition of three members to the TPSAC, in response to the district court’s order to reconstitute the committee. The FDA also announced that it would work expeditiously to fill the remaining vacancy. On January 15, 2016, the appellate court reversed the decision of the district court, finding that the plaintiffs did not have standing to challenge appointments of certain TPSAC members. Under the appellate court’s order, the three former committee members can serve once again on the TPSAC and the FDA can rely on the TPSAC menthol report. On February 26, 2016, the plaintiff tobacco manufacturers filed a petition for a rehearing en banc, which was denied in May 2016.

On August 16, 2011, five tobacco companies (including OPMs Reynolds Tobacco and Lorillard as well as SPMs Commonwealth Brands, Inc., Liggett Group LLC, and Santa Fe Natural Tobacco Company) filed a complaint against the FDA in the U.S. District Court for the District of Columbia, R.J. Reynolds Tobacco Co. v. U.S. Food and Drug Administration, challenging the FDA’s rule requiring new textual and graphic warning labels on cigarette packaging and advertisements. The tobacco companies sought a declaratory judgment that the FDA’s final rule violates the First Amendment and the Administrative Procedure Act (the “APA”). On February 29, 2012, the district court granted the plaintiffs’ motion for summary judgment and entered an order permanently enjoining the FDA, until 15 months following the issuance of new regulations implementing Section 201(a) of the FSPTCA that are substantively and procedurally valid and permissible under the United States Constitution and federal law, from enforcing against plaintiffs the new textual and graphic warnings required by Section 201(a) of the FSPTCA. The district court ruled that the mandatory graphic warnings violated the First Amendment by unconstitutionally compelling speech, and that the FDA had failed to carry both its burden of demonstrating a compelling interest for its rule requiring the textual and graphic warning labels and its burden of demonstrating that the rule is narrowly tailored to achieve a constitutionally permissible form of compelled commercial speech. The FDA filed an appeal with the U.S. Court of Appeals for the District of Columbia Circuit on March 4, 2012, and on August 24, 2012, the Court of Appeals affirmed the district court’s decision invalidating the graphic warning rule. On October 9, 2012, the FDA filed a motion for rehearing en banc with the Court of Appeals, and on December 5, 2012, the Court of Appeals denied the FDA’s petition for a rehearing en banc. On March 19, 2013, the FDA announced that it would not file a petition for a writ of certiorari with the U.S. Supreme Court, but instead would undertake research to support a new rulemaking on different warning labels consistent with the FSPTCA. In October 2016, several public health groups filed suit in the Federal District Court for the District of Massachusetts to force the FDA to issue final rules requiring graphic warnings on cigarette packs and advertising (American Academy of Pediatrics, et al v. United States Food and Drug Administration, No. 16-cv-11985, D. Mass.). In a March 5, 2019 Memorandum and Order, the court directed the FDA to submit by March 15, 2020 a final rule mandating color graphic warnings on cigarette packs and in cigarette advertisements as required by the FSPTCA. As discussed above under “—Warnings”, on March 17, 2020, the FDA issued its final rule to require new health warnings on cigarette packages and in advertisements to promote greater public understanding of the negative health consequences of smoking.

In 2015, cigarette manufacturers filed a lawsuit in the federal district court for the District of Columbia challenging the FDA’s draft guidance that had announced that certain label changes and changes to the quantity of

300 tobacco products in a package would each require submission of substantial equivalence reports and authorization from the FDA prior to marketing tobacco products with such changes. In August 2016, the court held that a modification to an existing product’s label does not result in a “new tobacco product” and therefore such a label change does not give rise to the substantial equivalence review process, but the court upheld the guidance document’s treatment of product quantity changes as modifications that give rise to a “new tobacco product” requiring substantial equivalence review. The parties did not appeal this decision, concluding the litigation.

Surgeon General Reports

In 1964, the Report of the Advisory Committee to the Surgeon General of the U.S. Public Health Service concluded that cigarette smoking was a health hazard of sufficient importance to warrant appropriate remedial action. Since this initial report in 1964, the Secretary of Health, Education and Welfare (now the Secretary of Health and Human Services) and the Surgeon General have issued a number of other reports that find the nicotine in cigarettes addictive and that link cigarette smoking and exposure to cigarette smoke with certain health hazards, including various types of cancer, coronary heart disease and chronic obstructive lung disease. These reports have recommended various governmental measures to reduce the incidence of smoking. Furthermore, there are various Surgeon General’s warnings that are required on cigarette packages and advertisements.

In June 2006, the Office of the Surgeon General released a report, “The Health Consequences of Involuntary Exposure to Tobacco Smoke.” It is a comprehensive review of health effects of involuntary exposure to tobacco smoke. It concludes definitively that secondhand smoke causes disease and adverse respiratory effects. It also concludes that policies creating completely smoke-free environments are the most economical and efficient approaches to providing protection to non-smokers. On September 18, 2007, the Office of the Surgeon General released the report, “Children and Secondhand Smoke Exposure,” which concludes that many children are exposed to secondhand smoke in the home and that establishing a completely smoke-free home is the only way to eliminate secondhand smoke exposure in that setting. The Surgeon General also addressed the health risks of second-hand smoke in its 2010 report entitled “How Tobacco Smoke Can Cause Disease: The Biology and Behavioral Basis for Smoking-Attributable Disease.” In 2012, the Surgeon General released a report on preventing tobacco use among youth and young adults, and on January 17, 2014, the Surgeon General released a report on the health consequences of smoking, contending that smoking is linked in the U.S. to a higher number of deaths than previous estimates, that filtered cigarettes may increase the risk of certain diseases, and that cigarettes are a causal factor in certain conditions and diseases that had not previously been linked to cigarette smoking. These reports are expected to strengthen arguments in favor of further smoking restrictions across the country.

In December 2016, the Surgeon General issued a report on e-cigarettes, raising public health concerns regarding the use of e-cigarettes by U.S. youth and young adults. The report recommended that state, local, tribal, and territorial governments implement additional laws and regulations to address e-cigarette use among youth and young adults, including: incorporating e-cigarettes into existing smoke-free policies; preventing youth access to e- cigarettes through various restrictions on sales of e-cigarettes to minors (including age verification requirements, prohibitions against self-service displays, and active enforcement of existing laws); implementing taxation and other price policies for e-cigarettes; increasing regulation of e-cigarette marketing by expanding evidence and facilitating the development of constitutionally feasible restrictions on such marketing; and targeting youth and young adults with educational initiatives on e-cigarettes and their potential for nicotine addiction and adverse health consequences. The report also calls for expanded federal funding of e-cigarette research efforts, including research on health risks and the impact of governmental policies on initiation and use patterns for e-cigarettes and other tobacco products, and recommends continued surveillance of e-cigarette marketing to assess the link between exposure to e-cigarette marketing and use of these products.

Other Federal Action

In October 2011, the FDA and the National Institutes of Health (the “NIH”) announced a joint national study called the “Tobacco Control Act National Longitudinal Study of Tobacco Users” to monitor and assess the behavioral and health impacts of new government tobacco regulations. This study, now referred to as the Population Assessment of Tobacco and Health (PATH) Study, started in 2013 and is the first large research effort undertaken by the NIH and the FDA after Congress gave the FDA authority to regulate tobacco products in 2009. About 49,000 people ages 12

301 years and older are participating in the PATH Study. The results of the study will be used to guide the FDA in targeting effective actions to reduce the effects of smoking on public health.

In November 2011, the FDA announced its plans for an integrated anti-smoking campaign targeting teenagers, with a combined budget of up to $600 million over five years. As part of this campaign, the FDA announced in February 2014 that advertisements would run for at least one year under the “Real Cost” campaign that targets young people aged 12-17 years and shows the costs and health consequences associated with tobacco use. The FDA reported that the “Real Cost” campaign prevented as many as 587,000 youths nationwide from smoking during 2014- 2016. According to the FDA, subsequent campaigns will target young adults aged 18-24 years and people who influence teens, including parents, family members and peers. In May 2018, the FDA announced that it expanded the “Real Cost” public education campaign with messages focused on preventing use by youth of e-cigarettes and announced the launch of the full-scale campaign in June 2019.

In March 2012, the CDC announced its first national anti-tobacco effort entitled “Tips From Former Smokers” (TIPS) which features graphic advertisements intended to shock smokers into quitting with stories of people damaged by tobacco products. The initial campaign’s goal was to convince 500,000 people to try quitting smoking and 50,000 to quit long-term, and the CDC reported that as a result of the 2012 campaign an estimated 1.6 million smokers attempted to quit smoking and more than 200,000 Americans had quit smoking immediately following the campaign, of which researchers estimated that more than 100,000 would likely quit smoking permanently, according to the CDC. The TIPS advertising campaign was subsequently renewed in March of 2013, July of 2014 and March of 2015 with new advertisements showing in stark terms the negative health effects of smoking. The CDC announced the launch of another graphic anti-smoking campaign beginning in January 2016, to run for 20 weeks on television, radio, billboards online and in magazines and newspapers. The CDC has reported that the TIPS advertising campaign helped prompt more than 16 million smokers to try to quit since it began in 2012, and approximately one million have quit for good because of the campaign. Annual budgets of the CDC have consistently included funds for tobacco prevention and control, including in order to continue the national tobacco education campaigns that are meant to raise awareness about the health effects of tobacco use and prompt smokers to quit.

In November 2008, the FTC rescinded guidance it issued in 1966 which provided that tobacco manufacturers were allowed to make factual public statements concerning the tar, nicotine and carbon monoxide yields of their cigarettes without violating the Federal Trade Commission Act if they were based on the “Cambridge Filter Method.” The Cambridge Filter Method is a machine-based test that “smokes” cigarettes according to a standard protocol and measures tar, nicotine and carbon monoxide yields. The FTC has determined that machine-based yields determined by the Cambridge Filter Method are relatively poor indicators of actual tar, nicotine and carbon monoxide exposure and may be misleading to individual consumers who rely on such information as indicators of the amount of tar, nicotine and carbon monoxide they will actually receive from smoking a particular cigarette and therefore do not provide a good basis for comparison among cigarettes. According to the FTC, this is primarily due to “smoker compensation,” which is the tendency of smokers of lower nicotine rated cigarettes to alter their smoking behavior in order to obtain higher doses of nicotine. Now that the FTC has withdrawn its guidance, tobacco manufacturers may no longer make public statements that state or imply that the FTC has endorsed or approved the Cambridge Filter Method or other machine-based testing methods in determining the tar, nicotine and carbon monoxide yields of their cigarettes. Factual statements concerning cigarette yields are allowed by the FTC if they are truthful, non-misleading and adequately substantiated, which is the same basis on which the FTC evaluates other advertising or marketing claims that are subject to the FTC’s jurisdiction. It is possible that the FTC’s rescission of its guidance regarding the Cambridge Filter Method could be cited as support for allegations by plaintiffs in pending or future litigation, or could encourage additional litigation against cigarette manufacturers.

The U.S. Defense Department has undertaken efforts to reduce smoking among members of the military. A March 14, 2014 Defense Department memo encouraged the services to eliminate tobacco sales and tobacco use on military bases, although it did not order specific actions. In April 2016, Defense Secretary Ash Carter approved a policy set forth in DoD Tobacco Policy Memorandum 16-001 which directs all Department of Defense facilities to restrict tobacco use to outdoor areas; directs military branches to implement plans to improve tobacco education for their personnel, strengthen programs for quitting tobacco, review efforts to institute smoke-free military housing and implement tobacco-free zones in areas frequented by children; and also requires tobacco prices at military base exchanges and commissaries to match local civilian store prices, including tax.

302 Excise Taxes

Cigarettes are subject to substantial excise taxes in the U.S. On February 4, 2009, President Obama signed into law, effective April 1, 2009, an increase of $0.62 in the excise tax per pack of cigarettes, bringing the total federal excise tax to $1.01 per pack, and significant tax increases on other tobacco products. The federal excise tax rate for snuff increased $0.925 per pound to $1.51 per pound. The federal excise tax on small cigars, defined as those weighing three pounds or less per thousand, increased by $48.502 per thousand to $50.33 per thousand. In addition, the federal excise tax rate for roll-your-own tobacco increased from $1.097 per pound to $24.78 per pound. Press reports have noted that many consumers who previously purchased roll-your-own tobacco began using pipe tobacco to roll their own cigarettes in order to avoid the new excise tax, as pipe tobacco excise taxes were unaffected, and using new, mechanized rolling machines to process cigarettes in bulk. Press reports have also noted that increased excise taxes have led to an increase in cigarette smuggling. On July 6, 2012, President Obama signed into law a provision classifying retailers that operate roll-your-own machines as cigarette manufacturers, thus requiring those retailers to pay the same tax rate as other cigarette manufacturers.

All of the states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands currently impose cigarette taxes, which ranged from $0.17 per pack in Missouri to $5.10 per pack in Puerto Rico, according to the Campaign for Tobacco-Free Kids as of June 15, 2020. Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that between the end of 1998 (the year in which the MSA was executed) and July 24, 2020, the weighted-average state cigarette excise tax increased from $0.36 to $1.83 per pack. In recent years, almost every state has increased tobacco taxes, according to the Campaign for Tobacco-Free Kids. According to a report by the American Lung Association, in 2009, 14 states turned to cigarette taxes to increase revenue in response to record state deficits. As reported by the American Lung Association’s Tobacco Policy Project/State Legislated Actions on Tobacco Issues (“SLATI”), six states passed cigarette excise tax increases during 2010, two states (Connecticut and Vermont) passed cigarette excise tax increases during 2011, and in 2012, Illinois and Rhode Island enacted legislation to increase their cigarette excise taxes. During 2013, Massachusetts, Minnesota, Oregon and Puerto Rico had enacted legislation to increase their cigarette taxes. In particular, Minnesota increased its cigarette excise tax in July 2013 by $1.60 per pack, and Massachusetts raised its excise tax by $1.00 per pack, effective July 31, 2013, bringing its tax to $3.51 per pack. New Hampshire’s cigarette tax also increased by $0.10 on August 1, 2013 due to legislation enacted in 2011. Vermont enacted a cigarette excise tax increase in 2014. During 2015, Alabama, Nevada, Kansas, Vermont, Louisiana, Ohio, Rhode Island and Connecticut enacted legislation to increase their cigarette excise taxes. During 2016, Louisiana, Pennsylvania, West Virginia and California enacted legislation to increase cigarette excise taxes. In particular, in California, a $2.00 per pack increase in the State’s cigarette excise tax (in addition to the State’s then current $0.87 per pack excise tax) was passed by voters on November 8, 2016, effective April 1, 2017. During 2017, Rhode Island, Delaware, Connecticut and Puerto Rico enacted legislation to increase their cigarette excise taxes. During 2018, Kentucky, Oklahoma, and Washington D.C. enacted cigarette excise tax increases. According to the Tobacco Consumption Report, New Mexico and Illinois increased their cigarette excise taxes during 2019. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, one state has increased cigarette excise taxes in 2020 and various increases are under consideration or have been proposed.

In addition to federal and state excise taxes, certain city and county governments also impose substantial excise taxes on tobacco products sold, such as New York City, Philadelphia and Chicago. It is expected that state and local governments will continue to raise excise taxes on cigarettes in future years.

All 50 states and the District of Columbia subject smokeless tobacco to excise taxes. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, a majority of states currently tax moist smokeless tobacco products using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. As of July 24, 2020, the federal government, 23 states, Puerto Rico, Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for moist smokeless tobacco, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, 26 states, the District of Columbia, Puerto Rico and a number of cities and counties have enacted

303 legislation to tax e-vapor products; these taxes are calculated in varying ways and may differ based on the e-vapor product form. Ten states and the District of Columbia have enacted legislation to tax oral nicotine pouches, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

According to the Campaign for Tobacco-Free Kids, six states have special taxes or fees on brands of manufacturers not participating in the State Settlement Agreements: Alaska, Michigan, Minnesota, Mississippi, Texas and Utah. Texas’s tax took effect on September 1, 2013, but in November 2013, a district court judge in Texas Small Tobacco Coalition. v. Combs (Tex. Dist. Ct., Travis Cnty.) ruled that the tax violated the Equal and Uniform Taxation clause of the Texas Constitution. The Texas Comptroller of Public Accounts appealed this decision on November 13, 2013, and on August 15, 2014 the Texas Court of Appeals affirmed the district court judge’s decision, holding that the tax violates the Texas Constitution, and enjoined Texas from collecting or assessing the tax. The State of Texas filed its petition for review with the Texas Supreme Court in October 2014, and on April 1, 2016, the Texas Supreme Court reversed the Texas Court of Appeals and ruled that the Texas equity fee legislation does not violate the Texas Constitution and remanded the case back to the Texas Court of Appeals for that court to consider the non-settling manufacturers’ remaining challenges to the legislation. On March 24, 2017, the Texas Court of Appeals granted Texas’ motion for summary judgment, ruling that the tax does not violate the equal protection and due process clauses of the U.S. Constitution.

In 2005, Minnesota enacted a 75-cent “health impact fee” on tobacco manufacturers for each pack of cigarettes sold, in order to recover Minnesota’s health costs related to or caused by tobacco use. The imposition of this fee was contested by Philip Morris and upheld by the Minnesota Supreme Court as not in violation of Minnesota’s settlement with the tobacco companies (and in February 2007, the U.S. Supreme Court denied Philip Morris’s petition for writ of certiorari). In 2013, however, the Minnesota legislature repealed the health impact fee (the bill cited the contemporaneous increase in the cigarette excise tax as offsetting the repeal of the health impact fee).

In November 2013, New York City passed an ordinance that set a minimum price of $10.50 for every pack of cigarettes sold in New York City and prohibited the use of coupons or other promotional discounts to lower that price. In August 2017 New York City further raised the minimum price of a pack of cigarettes to $13.00, effective June 1, 2018. On February 16, 2014, tobacco companies and trade groups representing cigarette retailers filed a motion for preliminary injunction in federal court to block that portion of the ordinance that prohibited the use of coupons and other promotional discounts (National Association of Tobacco Outlets Inc. et al. v. City of New York et al.), but in June 2014 the court upheld that portion of the ordinance. On July 1, 2020, New York State prohibited the use of coupons and other price discounts on cigarette sales.

Minimum Age to Possess or Purchase Tobacco Products

On December 20, 2019, the President of the United States signed legislation, effective January 1, 2020, banning the sale of tobacco products to anyone under the age of 21 (federal law had previously set the minimum age at 18). This federal legislation had been preceded by various states having raised the minimum age to purchase tobacco from 18 to 21 (or 19, in certain states), beginning in 2016 with Hawaii setting the minimum age at 21, and by numerous municipalities having enacted similar legislation. According to Altria, the following states enacted such legislation: Ohio (21), Maryland (21), Vermont (21), New York (21), Texas (21), Connecticut (21), Nebraska (19), Delaware (21), Illinois (21), Arkansas (21), Washington (21), Utah (21), Virginia (21), California (21), Hawaii (21), Alabama (19), Alaska (19), New Jersey (21), Oregon (21), Maine (21) and Massachusetts (21). According to the Campaign for Tobacco-Free Kids, prior to the federal legislation raising the minimum age, at least 540 localities had raised the tobacco age to 21.

On March 12, 2015, the Institute of Medicine of the National Academy of Sciences released a report concluding that raising the minimum legal age to 21 would likely decrease smoking prevalence by 12% among today’s teenagers when they become adults.

State and Local Regulation

Legislation imposing various restrictions on public smoking has been enacted in all of the states and many local jurisdictions. A number of states have enacted legislation designating a portion of increased cigarette excise

304 taxes to fund either anti-smoking programs, healthcare programs or cancer research. In addition, educational and research programs addressing healthcare issues related to smoking are being funded from industry payments made or to be made under the MSA.

The FSPTCA substantially expanded federal tobacco regulation, but state regulation of tobacco is not necessarily preempted by federal law in this instance. Importantly, the FSPTCA specifically allows states and localities to impose restrictions on the time, place and manner, but not content, of advertising and promotion of tobacco products. The FSPTCA also eliminated the prior federal preemption of state regulation that, in certain circumstances, had been upheld by the U.S. Supreme Court.

In addition to the FSPTCA disclosure requirements and marketing and labeling restrictions, several states have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose to state health authorities the ingredients used in the manufacture of cigarettes. According to SLATI, six states require some form of tobacco product disclosure information, including, for example, requiring tobacco manufacturers to disclose any added constituent of tobacco products other than tobacco, water and reconstituted tobacco sheet made wholly from tobacco (Massachusetts and Texas); requiring disclosure of the nicotine yield for each brand of cigarettes (Massachusetts, Texas and Utah); and requiring tobacco manufacturers to disclose the presence of ammonia, any compound of ammonia, arsenic, cadmium, formaldehyde or lead in their unburned or burned states (Minnesota and Utah). According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, Massachusetts passed legislation capping the amount of nicotine in vapor products, and similar legislation is pending in three other states.

In 2003, New York was the first state to pass legislation requiring the introduction of cigarettes with a lower likelihood of starting a fire. Cigarette manufacturers responded by designing cigarettes that would extinguish quicker when left unattended. Since then, according to SLATI, fire-safety standards for cigarettes identical to those of New York are in effect in all 50 states and the District of Columbia.

In July 2007, the State of Maine became the first state to enact a statute that prohibits the sale of cigarettes and cigars that have a characterizing flavor. The legislation defines characterizing flavor as “a distinguishable taste or aroma that is imparted to tobacco or tobacco smoke either prior to or during consumption, other than a taste or aroma from tobacco, menthol, clove, coffee, nuts or peppers.” In 2008 New Jersey passed similar legislation prohibiting the sale of cigarettes that have a characterizing flavor (other than the flavors of tobacco, clove or menthol). In February 2018, New Jersey introduced a bill that would add menthol to its list of prohibited characterizing flavors. Numerous counties and municipalities have adopted laws prohibiting or restricting the sale of certain tobacco products containing “characterizing flavors.” The scope of these laws varies from jurisdiction to jurisdiction; for example, some, but not all, of these laws exempt menthol from the definition of a “characterizing flavor,” and certain laws apply to tobacco products other than cigarettes. The “characterizing flavor” ordinances in New York City and Providence, Rhode Island were each challenged on the grounds, among others, that the FSPTCA preempts such local laws. The U.S. Courts of Appeals for the Second Circuit and First Circuit have held that the FSPTCA does not preempt the New York City and Providence, Rhode Island ordinances, respectively. In June 2017, San Francisco amended its city health code to prohibit tobacco retailers from selling flavored tobacco products, including flavored e-cigarettes and menthol cigarettes, and voters approved the measure on June 5, 2018. In June 2019, San Francisco’s Board of Supervisors voted to ban the sale and distribution of e-cigarettes in San Francisco. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the governors of eight states exercised executive action to temporarily prohibit either the sale of all e-vapor products or e-vapor products with flavors other than tobacco; some of those executive actions have been challenged in the courts and many of those executive actions have expired. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, 16 states and the District of Columbia have proposed legislation to ban flavors in one or more tobacco products, including vapor products, oral nicotine pouches and cigarettes, and four states, Massachusetts, New Jersey, Utah and New York, have passed such legislation. In September 2019, the Governor of Michigan directed the state health department to issue emergency rules to temporarily ban the sale of flavored vaping products. In November 2019, Massachusetts banned the sale of all flavored tobacco products, effective immediately for electronic cigarettes and other vapor products, and effective June 1, 2020 for menthol cigarettes. On January 21, 2020, New Jersey banned the sale of flavored vaping products, effective April 20, 2020. In March 2020, Rhode Island banned the sale of flavored e-cigarettes (making permanent the similar emergency regulations issued in 2019). In April 2020, New York

305 State banned the sale of vapor products in flavors other than tobacco (effective May 18, 2020). Los Angeles County banned the sale of all flavored tobacco products, including menthol cigarettes, effective May 1, 2020. On August 28, 2020, California enacted a statute prohibiting the retail sale of all flavored tobacco products, including menthol- flavored cigarettes and e-cigarettes, which becomes effective January 1, 2021 and allowing local ordinances to be more restrictive.

According to ANRF, as of August 15, 2020, 41 states and territories have laws that require 100% smoke-free non-hospitality workplaces or restaurants or bars (and only 14 states and territories do not have laws that require 100% smoke-free non-hospitality workplaces or restaurants or bars, being Alabama, Alaska, Arkansas, Georgia, Kentucky, Mississippi, Missouri, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wyoming). On September 4, 2014, Kentucky banned all uses of tobacco products on most government properties. Also according to ANRF, as of August 15, 2020, 29 states and territories have laws that require 100% smoke-free non-hospitality workplaces and restaurants and bars: Arizona, California, Colorado (with certain exemptions for marijuana smoking), Delaware, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan (with certain exemptions for marijuana smoking), Minnesota, Montana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Puerto Rico, Rhode Island, South Dakota, the U.S. Virgin Islands, Utah, Vermont, Washington and Wisconsin. Restrictions in many jurisdictions also include a ban on outdoor smoking within a specified number of feet of the entrances of restaurants and other public places. ANRF also tracks clean indoor air ordinances by local governments throughout the U.S. Most states without a statewide smoking ban have some local municipalities that have enacted smoking regulations. As of August 15, 2020, according to ANRF, there were 1,620 local jurisdictions with local laws that require 100% smoke-free non-hospitality workplaces or restaurants or bars, of which 1,129 local jurisdictions (including the District of Columbia) have local laws that require 100% smoke-free non-hospitality workplaces and restaurants and bars. In addition, according to ANRF, as of August 15, 2020, there were at least 957 gambling facilities that are required to be 100% smoke-free indoors, and there were at least 634 smoke-free airports. It is expected that restrictions on indoor smoking will continue to proliferate.

Smoking bans have also extended outdoors. For example:

• According to ANRF, as of October 2, 2017 (the most recent reference date), Puerto Rico prohibits smoking on beaches, Maine prohibits smoking on beaches in its state parks, and 317 municipalities had enacted ordinances that specified that all city beaches and/or specifically named city beaches are smoke-free. In July 2018, the Governor of New Jersey signed legislation banning smoking on all public beaches, effective January 1, 2019. On October 11, 2019, legislation banning smoking at all California state beaches was signed by the Governor, effective January 1, 2020;

• According to ANRF, as of October 2, 2017 (the most recent reference date), Oklahoma prohibits tobacco and e-cigarette use on all state lands and parks, Puerto Rico prohibits smoking in all parks, and 1,531 municipalities specified that all city parks and/or specifically named city parks are smoke- free. In addition, on March 31, 2016, New York’s highest court upheld a smoking ban in certain outdoor areas, state parks and historic sites; in July 2018, the Governor of New Jersey signed legislation banning smoking in public parks, effective January 1, 2019; and on October 11, 2019, legislation banning smoking at all California state parks was signed by the Governor, effective January 1, 2020;

• According to ANRF, as of August 15, 2020, Hawaii, Maine, Michigan, Washington and Puerto Rico laws prohibit smoking in both outdoor dining areas and bar patios (while Iowa prohibits smoking only in outdoor dining areas), and 555 municipalities have enacted laws for 100% smoke-free outdoor dining, while 373 municipalities have enacted laws for 100% smoke-free outdoor dining areas and bar patios; and

• According to ANRF, as of October 2, 2017 (the most recent reference date), Iowa, New York, Wisconsin, Guam and the U.S. Virgin Islands prohibit smoking in outdoor public transit waiting areas, and there are 535 municipalities with smoke-free outdoor public transit waiting area laws.

306 Smoking bans have also been enacted for smaller governmental and private entities. According to the ANRF, as of July 1, 2020, there are at least 2,511 100% smoke-free university and college campuses, and of these, 2,076 have a 100% tobacco-free policy and 2,130 prohibit the use of e-cigarettes anywhere on campus. The University of California implemented its system-wide smoke-free and tobacco-free policy effective January 1, 2014. ANRF further reports, as of August 15, 2020, that four national hospitals, clinics, insurers and health service companies, and at least 4,144 local and/or state hospitals, healthcare systems and clinics have adopted 100% smoke-free grounds policies; that in July 2013, New York State enacted a law requiring 100% smoke-free grounds of general hospitals; in April 2016, Hawaii enacted a law requiring 100% tobacco- and e-cigarette-free grounds of state health facility properties; and that certain municipalities had enacted laws specifically requiring 100% smoke-free hospital grounds. In addition, ANRF reports as of October 1, 2019 (the most recent reference date) that, effective January 2015, the Federal Bureau of Prisons prohibits the smoking of tobacco in any form in and on the grounds of its institutions and offices, that correctional facilities in 23 states and territories are 100% smoke-free indoors and outdoors, and that 27 other states ban smoking indoors in correctional facilities (but allow smoking in outdoor areas). ANRF reports that as of August 15, 2020, six states and 260 municipalities have laws requiring that all hotel and motel rooms be 100% smoke-free. Furthermore, ANRF reports as of August 15, 2020 that 63 municipalities prohibit, and an additional 19 municipalities partially restrict, smoking in private units of market-rate multi-unit housing (whether privately-owned or publicly- owned housing), and 623 municipalities have smoke-free policies for publicly-owned multi-unit housing. The Department of Housing and Urban Development prohibits smoking in public housing residences nationwide under a federal rule effective February 3, 2017, which gave public housing agencies 18 months to put smoke-free policies into effect.

Voluntary Private Sector Regulation

In recent years, many employers have initiated programs restricting or eliminating smoking in the workplace and providing incentives to employees who do not smoke, including charging higher health insurance premiums to employees who smoke and refusing to hire people who do smoke, and many common carriers have imposed restrictions on passenger smoking more stringent than those required by governmental regulations. Similarly, many restaurants, hotels and other public facilities have imposed smoking restrictions or prohibitions more stringent than those required by governmental regulations, including outright bans. According to the Tobacco Consumption Report, New York City’s first non-smoking apartment building opened in 2009, and many landlords and condominium associations in California and New York City have also established smoke-free apartment policies, including Related Companies, which manages 40,000 rental units across the country and announced in 2013 a ban on smoking for all new tenants.

International Agreements

On March 1, 2003, the member nations of the World Health Organization concluded four years of negotiations on an international treaty, the Framework Convention on Tobacco Control (the “FCTC”), whose objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The FCTC entered into force in February 2005, and according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, 181 countries and the European Community have become party to the FCTC. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things: establish specific actions to prevent youth tobacco product use; restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship; initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke and the benefits of quitting; implement regulations imposing product testing, disclosure and performance standards; impose health warning requirements on packaging; adopt measures intended to combat tobacco product smuggling and counterfeit tobacco products, including tracking and tracing of tobacco products through the distribution chain; and restrict smoking in public places, according to Altria in its SEC filings. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

307 Civil Litigation

Overview

Legal proceedings or claims covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the tobacco industry. Several types of claims are raised in these proceedings including, but not limited to, claims for product liability, consumer protection, antitrust, and reimbursement. Litigation is subject to many uncertainties and it is possible that there could be material adverse developments in pending or future cases. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. It can be expected that at any time and from time to time there will be developments in the litigation presently pending and filing of new litigation that could materially adversely affect the business of the PMs and the market for or prices of securities such as the Series 2020 Bonds payable from tobacco settlement payments made under the MSA.

Thousands of claims have been brought against the PMs in tobacco-related litigation. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, the following tobacco-related cases were pending in the U.S. against Philip Morris and, in some instances, Altria, as of July 24, 2020: 116 individual smoking and health cases (see “—Individual Smoking and Health Cases” below); 1,471 flight attendant cases (see “—Flight Attendant Cases” below); approximately 1,400 Engle Progeny Cases in state court (involving approximately 1,800 state court plaintiffs) and 4 Engle Progeny Cases in federal court (see “—Engle Progeny Cases” below); 2 smoking and health class action cases and aggregated claims and an additional 2 “Lights/Ultra Lights” class action cases (see “—Class Action Cases and Aggregated Claims” below); the federal government’s health care cost recovery case (see “—Health Care Cost Recovery Cases” below); and 621 e-vapor cases (see “—E-Vapor Cases” below). Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that after exhausting all appeals in cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004 Philip Morris has paid in the aggregate judgments (and related costs and fees) totaling approximately $753 million and interest totaling approximately $216 million as of June 30, 2020.

Plaintiffs assert a broad range of legal theories in these cases, including, among others, theories of negligence, fraud, misrepresentation, strict liability in tort, design defect, breach of warranty, enterprise liability (including claims asserted under RICO), civil conspiracy, intentional infliction of harm, injunctive relief, indemnity, restitution, unjust enrichment, public nuisance, unfair trade practices, claims based on antitrust laws and state consumer protection acts, and claims based on failure to warn of the harmful or addictive nature of tobacco products.

The MSA does not release the PMs from liability in individual plaintiffs’ cases or in class action lawsuits. Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and punitive damages that may range into the billions of dollars. Plaintiffs in some of the cases have sought treble damages, statutory damages, disgorgement of profits, equitable and injunctive relief, and medical monitoring and smoking cessation programs, among other damages.

The list below specifies certain categories of tobacco-related cases pending against the tobacco industry. A summary description of each type of case follows the list.

Type of Case Individual Smoking and Health Cases Flight Attendant Cases Engle Progeny Cases Class Action Cases and Aggregated Claims Health Care Cost Recovery Cases E-Vapor Cases

“Individual Smoking and Health Cases” are smoking and health cases brought by or on behalf of individual plaintiffs who allege personal injury caused by smoking cigarettes, by using smokeless tobacco products, by addiction

308 to tobacco, or by exposure to environmental tobacco smoke (but this category of cases as described herein does not include the Flight Attendant Cases or Engle Progeny Cases discussed below).

“Flight Attendant Cases” are brought by non-smoking flight attendants alleging injury from exposure to environmental smoke in the cabins of aircraft. Plaintiffs in these cases may not seek punitive damages for injuries that arose prior to January 15, 1997. The time for filing Flight Attendant Cases expired in 2000, and thereafter no additional cases in this category may be filed.

“Engle Progeny Cases” are brought by individuals who purport to be members of the decertified Engle class. These cases are pending in a number of Florida courts. The time period for filing Engle Progeny Cases expired in January 2008, and thereafter no additional cases may be filed. Some of the Engle Progeny Cases were filed on behalf of multiple class members. Some of the courts hearing the cases filed by multiple class members severed these suits into separate individual cases. It is possible the remaining suits filed by multiple class members may also be severed into separate individual cases.

“Class Action Cases” are purported to be brought on behalf of large numbers of individuals for damages allegedly caused by smoking, including, among other categories, “lights” class action cases. Aggregated claims are claims of a number of individual plaintiffs that are to be tried in a single proceeding.

“Health Care Cost Recovery Cases” are brought by or on behalf of entities seeking equitable relief and reimbursement of expenses incurred in providing health care to individuals who allegedly were injured by smoking. Plaintiffs in these cases have included the U.S. federal government, U.S. state and local governments, foreign governmental entities, hospitals or hospital districts, American Indian tribes, labor unions, private companies and private citizens. Included in this category is the suit filed by the federal government, United States of America v. Philip Morris USA, Inc., et al. (the “DOJ Case”), that sought to recover profits earned by the defendants and other equitable relief.

“E-Vapor Cases” are cases relating to e-cigarettes and other vapor products, brought as class actions or by individuals, state or local governments or school districts, seeking various remedies including damages and injunction.

Individual Smoking and Health Cases

This category of cases includes smoking and health cases alleging personal injury caused by smoking cigarettes, by using smokeless tobacco products, by addiction to tobacco, or by exposure to environmental tobacco smoke that are brought by or on behalf of individual plaintiffs, but as described herein does not include the Flight Attendant Cases or Engle Progeny Cases discussed below. An example of an Individual Smoking and Health Case is , in which, in August 2019, a jury in a Massachusetts state court returned a verdict in favor of plaintiff, awarding $11 million in compensatory damages and $10 million in punitive damages, and Philip Morris and plaintiff have appealed, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. Another example of an Individual Smoking and Health Case is Greene, in which a jury in a Massachusetts state court returned a verdict in September 2019 in favor of plaintiffs and against Philip Morris, awarding approximately $10 million in compensatory damages; in May 2020, the court ruled on plaintiffs’ remaining claim and trebled the compensatory damages award to approximately $30 million, and Philip Morris plans to file post-trial motions, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

Flight Attendant Cases

The Flight Attendant Cases were filed as a result of a settlement agreement by the parties in Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Miami-Dade County, Florida, filed October 31, 1991), a class action brought on behalf of flight attendants claiming injury as a result of exposure to environmental tobacco smoke in airplane cabins. The settlement agreement, among other things, permitted the plaintiff class members to file these individual suits. The settlement agreement bars class members from bringing aggregate claims, bars class members from obtaining punitive damages, and bars individual claims to the extent that they are based on fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO, suppression, concealment or any other alleged intentional or willful conduct. The defendant tobacco manufacturers agreed that, in any individual case brought

309 by a class member, the defendant will bear the burden of proof with respect to whether environmental tobacco smoke can cause certain specifically enumerated diseases, referred to as “general causation.” With respect to all other issues relating to liability, including whether an individual plaintiff’s disease was caused by his or her exposure to environmental tobacco smoke in airplane cabins, referred to as “specific causation,” the individual plaintiff will have the burden of proof. On September 7, 1999, the Florida Supreme Court approved the settlement, and the individual Flight Attendant Cases arose out of such settlement. In October 2000, the Broin court entered an order applicable to all Flight Attendant Cases that the terms of the settlement agreement do not require the individual plaintiffs in the Flight Attendant Cases to prove the elements of strict liability, breach of warranty or negligence. Under the order, there is a rebuttable presumption in the plaintiffs’ favor on those elements, and the plaintiffs bear the burden of proving that their alleged adverse health effects actually were caused by exposure to environmental tobacco smoke in airplane cabins (specific causation). The period for filing Flight Attendant Cases expired in 2000, and thereafter no additional cases in this category may be filed.

According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, 1,471 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke were pending as of July 24, 2020, and an additional 923 Flight Attendant Cases were voluntarily dismissed without prejudice in March 2018.

Engle Progeny Cases

The case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994) was certified in 1996 as a class action on behalf of Florida residents, and survivors of Florida residents, who were injured or died from medical conditions allegedly caused by addiction to smoking. During the three-phase trial, a Florida jury awarded compensatory damages to three individuals and approximately $145 billion in punitive damages to the certified class. In Engle v. Liggett Group, Inc., 945 So.2d 1246 (Fla. 2006), the Florida Supreme Court vacated the punitive damages award, determined that the case could not proceed further as a class action and ordered decertification of the class. The Florida Supreme Court also reinstated the compensatory damages awards to two of the three individuals whose claims were heard during the first phase of the Engle trial. These two awards totaled approximately $7 million.

The Florida Supreme Court’s 2006 ruling also permitted Engle class members to file individual actions, including claims for punitive damages. The court further held that these individuals are entitled to rely on a number of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial. These findings included that smoking cigarettes causes a number of diseases; that cigarettes are addictive or dependence-producing; and that the defendants were negligent, breached express and implied warranties, placed cigarettes on the market that were defective and unreasonably dangerous, and concealed or conspired to conceal the risks of smoking. The time period for filing Engle Progeny Cases expired in January 2008, and thereafter no additional cases may be filed. In 2009, the Florida Supreme Court rejected a petition that sought to extend the time for purported class members to file an additional lawsuit.

In the wake of the Florida Supreme Court ruling, thousands of individuals filed separate lawsuits seeking to benefit from the Engle findings. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, 134 state and federal Engle Progeny Cases involving Philip Morris have resulted in verdicts since the Florida Supreme Court’s Engle decision: 78 verdicts were returned in favor of plaintiffs (four of which were reversed post-trial or on appeal and remain pending, and one of which resulted in an appellate reversal of a jury verdict in favor of plaintiff and a judgment in favor of Philip Morris); 48 verdicts were returned in favor of Philip Morris (four of which were subsequently reversed for new trials); 2 verdicts were returned in favor of Philip Morris with zero damages; 2 verdicts were returned against Philip Morris awarding no damages but the trial court in each case decided to award plaintiffs damages; one verdict was returned in favor of Philip Morris following a retrial of an initial verdict returned in favor of plaintiff (appeals by plaintiff and defendants are pending); and three verdicts were returned in favor of plaintiffs following retrial of initial verdicts returned in favor of plaintiffs (post-trial motions or appeals are pending). In addition, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020 approximately 1,400 state court cases were pending against Philip Morris or Altria asserting individual claims by or on behalf of approximately 1,800 state court plaintiffs, and 4 cases were pending against Philip Morris in federal court representing the federal cases excluded from the settlement agreement discussed below.

310 On October 23, 2013, Vector Group Ltd. announced that it and its subsidiary Liggett reached a comprehensive settlement (which is now final) resolving substantially all of the individual Engle Progeny Cases pending against them. Under the settlement, which did not require court approval, approximately 4,900 (out of approximately 5,300) individual Engle plaintiffs would dismiss their claims against Vector Group Ltd. and Liggett. Vector Group Ltd. recorded a charge of approximately $86 million for the year ended December 31, 2013 related to the settlement agreement. Pursuant to the terms of the agreement, Liggett will pay a total of $110 million, with approximately $61.6 million paid collectively in December 2013 and February 2014, and the balance to be paid in equal annual installments over the following 14 years.

In February 2015, Philip Morris, Reynolds Tobacco and Lorillard settled virtually all of the Engle Progeny Cases then pending against them in federal district court. The total amount of the settlement of the federal Engle Progeny Cases was $100 million, divided among Reynolds Tobacco ($42.5 million), Philip Morris ($42.5 million) and Lorillard ($15 million), which shares of the settlement were paid into escrow in March 2015. The settlement, which received final approval from the court on November 6, 2015, covers more than 400 federal Engle Progeny Cases but does not cover certain federal Engle Progeny Cases previously tried to verdict and pending on post-trial motions or appeal, or filed by different lawyers from the ones who negotiated the settlement for the plaintiffs. Also, certain state court cases were removed from state to federal court, which were not part of the settlement, and were all remanded back to state court.

At the beginning of the Engle Progeny Cases litigation, a central issue was the proper use of the preserved Engle findings. The tobacco manufacturers had argued that use of the Engle findings to establish individual elements of progeny claims (such as defect, negligence and concealment) was a violation of federal due process, but in 2013, both the Florida Supreme Court (in the Douglas case) and the Eleventh Circuit (in the Duke and Walker cases) rejected that argument. In May 2017, the en banc Eleventh Circuit (in the Graham case) rejected Reynolds Tobacco’s due process and implied preemption arguments, holding that giving preclusive effect to the findings of negligence and strict liability by the Engle jury in individual Engle Progeny Case actions against the tobacco companies is not preempted by federal tobacco laws and does not deprive the tobacco companies of due process. In addition, in 2018 the Eleventh Circuit (in the Burkhart and Searcy cases) rejected defendants’ arguments that application of the Engle findings to the Engle progeny plaintiffs’ concealment and conspiracy claims violated defendants’ due process rights. The U.S. Supreme Court denied the tobacco manufacturers’ petitions for writ of certiorari in all of the above-described cases where such petitions were sought.

In addition to the global due process argument, the tobacco manufacturers raise many other factual and legal defenses as appropriate in each case, including, among other things, arguing that the plaintiff is not a proper member of the Engle class, that the plaintiff did not rely on any statements by any tobacco company, that the trial was conducted unfairly, that some or all claims are preempted or barred by applicable statutes of limitation, or that any injury was caused by the smoker’s own conduct.

In Soffer, the Florida First District Court of Appeal held that Engle progeny plaintiffs can recover punitive damages only on their intentional tort claims; the Florida Supreme Court accepted jurisdiction over plaintiff’s appeal from the Florida First District Court of Appeal’s decision and, in March 2016, held that Engle progeny plaintiffs can recover punitive damages in connection with all of their claims, and the plaintiffs now generally seek punitive damages in connection with all of their claims in Engle Progeny Cases, according to Altria in its SEC filings. In Schoeff, the Florida Supreme Court held that comparative fault does not reduce compensatory damages awards for intentional torts, according to Altria in its SEC filings.

In the Engle Progeny Case Robinson v. R.J. Reynolds, on July 18, 2014 a jury in Escambia County, Florida rendered a verdict against Reynolds Tobacco and awarded plaintiff $16.9 million in compensatory damages and $23.6 billion in punitive damages for the lung cancer of plaintiff’s spouse who smoked Kool brand cigarettes for more than 20 years from age 13 to his death at age 36. Reynolds Tobacco filed a motion on July 28, 2014 to set aside the jury’s verdict on the grounds that it was unconstitutionally disproportionate to plaintiff’s actual damages. The court entered partial judgment on the compensatory damages against Reynolds Tobacco in the amount of $16.9 million on July 21, 2014. On January 27, 2015 the court denied the defendant’s post-trial motions, but granted the defendant’s motion for remittitur of the punitive damages award. The punitive damages award was remitted to approximately $16.9 million. In February 2015, Reynolds Tobacco filed an objection to the remitted award of punitive damages and

311 a demand for a new trial on damages. The court granted a new trial on the amount of punitive damages only. The new trial on punitive damages was stayed pending Reynolds Tobacco’s appeal to the First District Court of Appeal of the partial judgment of compensatory damages and of the order granting a new trial on the amount of punitive damages only. On February 24, 2017, the First District Court of Appeal reversed the judgment of the trial court and remanded the case for a new trial. On May 17, 2017, the First District Court of Appeal denied the plaintiff’s motion for rehearing and the plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court on June 14, 2017, which the Florida Supreme Court denied.

In another Engle Progeny Case, Rintoul (Caprio), a verdict was rendered in November 2019 against the defendants Philip Morris and Reynolds Tobacco in the amount of $9 million in compensatory damages and $74 million in punitive damages; defendants’ post-trial motion is pending, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. Various Engle Progeny Cases in addition to the cases described herein are discussed in detail in the SEC filings of Altria. As of July 24, 2020, no Engle Progeny Cases are set for trial through September 30, 2020, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. Trial schedules are subject to change.

In June 2009, Florida amended its existing bond cap statute by adding a $200 million bond cap that applied to all Engle Progeny Cases in the aggregate. In May 2011, Florida removed the provision that would have allowed it to expire on December 31, 2012. The bond cap for any given individual Engle Progeny Case varies depending on the number of judgments in effect at a given time, but never exceeds $5 million per case for appeals within the Florida state court system. The legislation, which became effective in June 2009 and 2011, applies to judgments entered after the original 2009 effective date. The plaintiffs in some cases challenged the constitutionality of the amended statute, but the challenges were unsuccessful. No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to Engle Progeny Cases tried in federal court, according to Altria in its Form 10- Q filed with the SEC for the six-month period ended June 30, 2020. From time to time, legislation has been presented to the Florida legislature that would repeal the 2009 appeal bond cap statute; however to date, no legislation repealing the statute has passed, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

Class Action Cases and Aggregated Claims

In 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco Co. overturned the certification of a nation-wide class of persons whose claims related to alleged addiction to tobacco products, finding that the district court failed to properly assess variations in the governing state laws and whether common issues predominated over individual issues. Since the Fifth Circuit’s ruling in Castano, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts; in general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope), according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. In most of the class action cases, plaintiffs seek class certification on behalf of groups of cigarette smokers, or the estates of deceased cigarette smokers, who reside in the state in which the case is filed. Several categories of class action cases are discussed below.

“Lights” Class Action Cases. In “lights” class action cases, plaintiffs generally allege that the tobacco manufacturers made false and misleading claims that “lights” cigarettes were lower in tar and nicotine and/or were less hazardous or less mutagenic than other cigarettes. These cases typically are filed pursuant to state consumer protection laws and related statutes.

In one of the “lights” class action cases, Good v. Altria Group, Inc., et al., the U.S. Supreme Court ruled in December 2008 that neither the Federal Cigarette Labeling and Advertising Act nor the Federal Trade Commission’s regulation of cigarettes’ tar and nicotine disclosures preempts (or bars) certain of plaintiffs’ claims. Although the Court rejected the argument that the Federal Trade Commission’s actions were so extensive with respect to the descriptors that the state law claims were barred as a matter of federal law, the Court’s decision was limited: it did not address the ultimate merits of plaintiffs’ claim, the viability of the action as a class action, or other state law issues. The case was returned to the federal court in Maine and consolidated by the Judicial Panel on Multidistrict Litigation (“JPMDL”) with other federal cases in a multidistrict litigation proceeding. In June 2011, the plaintiffs voluntarily dismissed the Good case without prejudice after the district court denied plaintiffs’ motion for class certification,

312 concluding the litigation. The other multidistrict cases were either voluntarily dismissed or resolved in a manner favorable to Philip Morris, according to Altria’s SEC filings.

The Price Case. In Price, et al v. Philip Morris Inc. (Circuit Court, Madison County, Illinois, filed February 10, 2000) the trial judge found in favor of the plaintiff class and awarded $7.1 billion in compensatory damages and $3 billion in punitive damages against Philip Morris in 2003. In December 2005, the Illinois Supreme Court issued its judgment reversing the trial court’s judgment in favor of the plaintiffs and directing the trial court to dismiss the case. In December 2006, the defendant’s motion to dismiss and for entry of final judgment was granted, and the case was dismissed with prejudice. In December 2008, plaintiffs filed with the trial court a petition for relief from the final judgment and sought to vacate the 2005 Illinois Supreme Court judgment, contending that the U.S. Supreme Court’s December 2008 decision in Good demonstrated that the Illinois Supreme Court’s decision was “inaccurate.” In February 2009, the trial court granted Philip Morris’s motion to dismiss plaintiffs’ petition. In March 2009, the plaintiffs filed a notice of appeal with the Illinois Appellate Court, Fifth Judicial District. In February 2011, the Illinois Appellate Court, Fifth Judicial District reversed the trial court’s dismissal of plaintiffs’ petition and remanded for further proceedings, and on September 28, 2011, the Illinois Supreme Court denied Philip Morris’ petition for leave to appeal that ruling. As a result, the case returned to the trial court for proceedings on whether the court should grant the plaintiffs’ petition to reopen the prior judgment. In February 2012, plaintiffs filed an amended petition, which Philip Morris opposed. Subsequently, in responding to Philip Morris’s opposition to the amended petition, plaintiffs asked the trial court to reinstate the original judgment. On December 12, 2012, the trial court denied the plaintiffs’ request to reopen the prior judgment, and the plaintiffs filed a notice of appeal to the Fifth District Appellate Court on January 8, 2013. On April 29, 2014, the Fifth District Appellate Court reinstated the $10.1 billion 2003 verdict. In May 2014, Philip Morris filed a petition requesting the Illinois Supreme Court to direct the Fifth Judicial District to vacate its April 2014 judgment and to order the Fifth Judicial District to affirm the trial court’s denial of the plaintiff’s petition for relief from the judgment, or in the alternative, grant its petition for leave to appeal. On September 24, 2014, the Illinois Supreme Court agreed to hear Philip Morris’s appeal. In November 2015, the Illinois Supreme Court vacated the judgments of the lower courts and dismissed the case without prejudice to allow the plaintiffs to file a motion to recall the mandate. The plaintiffs filed a motion to recall the mandate or for other appropriate relief in the Illinois Supreme Court, which was denied on January 11, 2016. In January 2016 plaintiffs filed a petition for writ of certiorari with the United States Supreme Court on the question of whether one of the Illinois Supreme Court justices should have recused himself, and in June 2016 the U.S. Supreme Court denied plaintiffs’ petition for writ of certiorari, concluding the litigation.

According to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, 21 state courts in 23 “lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or entered judgment in favor of Philip Morris. As of July 24, 2020, two “lights” class actions were pending in U.S. state court, and neither case is active, according to Altria’s Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

Other Class Action Cases. Other categories of class action cases include, among others, (i) medical monitoring class action cases, wherein plaintiffs seek to recover the cost for, or otherwise the implementation of, court-supervised programs for ongoing medical monitoring providing members of the purported class low dose CT scanning in order to identify and diagnose lung cancer, and other relief such as court-supervised smoking cessation programs; (ii) e-cigarette class action cases (discussed below), wherein plaintiffs seek damages, alleging that defendants made false and misleading claims that e-cigarettes are less hazardous than other cigarette products or failed to disclose that e-cigarettes expose users to certain substances; and (iii) class action cases seeking damages related to Santa Fe Natural Tobacco Company’s allegedly deceptive use of the words “natural” and “additive-free” in the labeling, advertising, and promotional materials for Natural American Spirit brand cigarettes.

Aggregated Claims. In a 1999 administrative order, the West Virginia Supreme Court of Appeals transferred to a single West Virginia court a group of roughly 1,200 cases brought by individuals who allege cancer or other health effects caused by smoking cigarettes, smoking cigars, or using smokeless tobacco products (the “West Virginia Cases”). The plaintiffs’ claims alleging injury from smoking cigarettes were consolidated for trial. The time for filing a case that could be consolidated for trial with the West Virginia Cases expired in 2000. The cases were consolidated for a Phase I trial on various defense conduct issues, to be followed in Phase II by individual trials of remaining claims to determine liability and compensatory damages. On May 15, 2013, the Phase I jury found that defendants’ cigarettes

313 were not defectively designed; defendants’ cigarettes were not defective due to a failure to warn before July 1, 1969; defendants were not negligent, did not breach warranties, and did not engage in conduct warranting punitive damages; and defendants’ ventilated filter cigarettes manufactured and sold between 1964 and July 1, 1969 were defective for a failure to instruct. In November 2014, the West Virginia Supreme Court affirmed the verdict. On June 8, 2015, the U.S. Supreme Court denied the plaintiffs’ petition for writ of certiorari. On the same date, the trial court issued an order finding that only 30 plaintiffs are alleged to have smoked ventilated filter cigarettes in the relevant period. According to Altria, the 30 civil actions were to be tried in six consolidated trials in West Virginia, but the parties agreed to resolve the cases for an immaterial amount, and in the second quarter of 2018 the court dismissed all 30 cases.

Health Care Cost Recovery Cases

Health Care Cost Recovery Cases are brought by or on behalf of entities seeking equitable relief and reimbursement of expenses incurred in providing health care to individuals who allegedly were injured by smoking. Plaintiffs in these cases have included the U.S. federal government, U.S. state and local governments, foreign governmental entities, hospitals or hospital districts, American Indian tribes, labor unions, private companies and private citizens. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti- racketeering statutes.

According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, although there have been some decisions to the contrary, most judicial decisions in the U.S. have dismissed all or most health care cost recovery claims against cigarette manufacturers; nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions, and the U.S. Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five federal circuit courts of appeals. The MSA and the Previously Settled State Settlements were executed in settlement of asserted and unasserted health care cost recovery and other claims.

The DOJ Case. In 1999, in United States v. Philip Morris USA Inc., the U.S. Department of Justice brought an action against various tobacco manufacturers in the U.S. District Court for the District of Columbia. The government initially sought to recover federal funds expended by the federal government in providing health care to smokers who developed diseases and injuries alleged to be smoking-related, based on several federal statutes. In addition, the government sought, pursuant to the civil provisions of RICO, disgorgement of profits the government contended were earned as a consequence of a RICO racketeering “enterprise.” In September 2000, the district court dismissed the government’s claims asserted under the Medical Care Recovery Act as well as those under the Medicare Secondary Payer provisions of the Social Security Act, but did not dismiss the RICO claims. In February 2005, the Circuit Court of Appeals for the District of Columbia ruled that disgorgement is not an available remedy in the case. The government’s petition for writ of certiorari with the U.S. Supreme Court was denied in October 2005. The non- jury, bench trial concluded in June 2005, and in August 2006, the U.S. District Court for the District of Columbia issued its final judgment and remedial order in favor of the government. The court determined that the defendants violated certain provisions of the RICO statute, that there was a likelihood of present and future RICO violations, and that equitable relief was warranted. The government was not awarded monetary damages.

The equitable relief included permanent injunctions that prohibit the defendant tobacco manufacturers from engaging in any act of racketeering, as defined under RICO; from making any material false or deceptive statements concerning cigarettes; from making any express or implied statement about health on cigarette packaging or promotional materials (these prohibitions include a ban on using such descriptors as “low tar,” “light,” “ultra-light,” “mild” or “natural”); from making any statements that “low tar,” “light,” “ultra-light,” “mild” or “natural” or low- nicotine cigarettes may result in a reduced risk of disease; and from participating in the management or control of

314 certain entities or their successors. The final judgment and remedial order also require the defendants to make corrective statements on their websites, in certain media, in point-of-sale advertisements, and on cigarette package “onserts” (as described below). In addition, the final judgment and remedial order require defendants to make disclosures of disaggregated marketing data to the government, and to make document disclosures on a website and in a physical depository, and also prohibits each defendant that manufactures cigarettes from selling any of its cigarette brands or certain elements of its business unless certain conditions are met.

On November 27, 2012 the U.S. District Court for the District of Columbia issued an order specifying the text of the corrective statements that the defendants must make on their websites and through other media. The court ordered that the corrective statements include statements, among others, to the effect that smoking kills on average 1,200 Americans every day, results in various detrimental health conditions and is highly addictive, that low tar and light cigarettes are not less harmful than regular cigarettes and cause some of the same detrimental health conditions that regular cigarettes cause, that tobacco companies intentionally designed cigarettes to make them more addictive, and that secondhand smoke causes lung cancer and coronary heart disease in adults who do not smoke. The court further ordered the parties to engage in discussions with the court, regarding implementation of the corrective statements. In January 2013, defendants appealed to the U.S. Court of Appeals for the District of Columbia Circuit the district court’s November 2012 order on the text of the corrective statements, claiming a violation of free speech rights.

During the following several years, the parties engaged in court proceedings regarding the content and implementation of the corrective statements. In June 2017, after the U.S. Court of Appeals ordered revisions to the corrective statements, the U.S. District Court for the District of Columbia issued an order adopting modified corrective statements, featuring a preamble to the effect that a federal court has ordered the OPMs to make the specified statements, and featuring statements regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of significant health benefit from smoking “low tar,” “light,” “ultra light,” “mild” and “natural” cigarettes, the manipulation of cigarette design and composition to ensure optimum nicotine delivery, and the adverse health effects of exposure to second hand smoke.

In October 2017, the U.S. District Court for the District of Columbia approved the parties’ consent order implementing the corrective statements remedy for newspapers and television. According to the October 2017 court order, in November 2017 the OPMs began running court-mandated announcements containing the agreed-upon corrective statements. Television announcements were between 30 and 45 seconds long and ran in prime time five days a week for 52 weeks. Full-page print ads appeared in at least 45 newspapers and ran on five weekends spread over approximately four months, and also appeared on the newspapers’ websites. According to Altria in its Form 10- Q filed with the SEC for the six-month period ended June 30, 2020, the parties reached agreement in April 2018 on the implementation details of the corrective statements remedy for “onserts” affixed to cigarette packs and for company-owned websites. Under the agreement, the corrective statements began appearing on company-owned websites in the second quarter of 2018 and the onserts began appearing in the fourth quarter of 2018. Altria stated in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that in 2014 and 2019, Altria and Philip Morris recorded provisions totaling $36 million for the estimated costs of implementing the corrective communications remedy ($31 million in 2014 and $5 million in 2019).

The requirements related to corrective statements at point-of-sale remain outstanding. According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, in May 2018 the parties submitted a joint status report and additional briefing on point-of-sale signage to the district court, and in May 2019, the district court ordered a hearing on the point-of-sale signage issue. A hearing date has not been scheduled.

E-Vapor Cases

According to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020, as of July 24, 2020, Altria and/or its subsidiaries, including Philip Morris, were named as defendants in 25 class action lawsuits relating to JUUL e-vapor products; Juul Labs, Inc. is an additional named defendant in each of these lawsuits. The theories of recovery include violation of RICO; fraud; failure to warn; design defect; negligence; and unfair trade practices; plaintiffs also sought to add antitrust claims due to the April 1, 2020 administrative complaint filed by the FTC, and although the court denied this request in the class action lawsuits, the individual antitrust claims remain

315 pending before the same court. Plaintiffs seek various remedies including compensatory and punitive damages and an injunction prohibiting product sales. Altria and/or its subsidiaries, including Philip Morris, also have been named as defendants in other lawsuits involving JUUL e-vapor products, including 561 individual lawsuits, 11 lawsuits filed by school districts and 14 lawsuits filed by state or local governments, including the state of Hawaii, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020; Juul Labs, Inc. is an additional named defendant in each of these lawsuits. The majority of the individual and class action lawsuits mentioned above were filed in federal court, and in October 2019, the United States Judicial Panel on Multidistrict Litigation ordered the coordination or consolidation of these lawsuits in the United States District Court for the Northern District of California for pretrial purposes, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. An additional group of cases is pending in California state courts; in January 2020, the Judicial Council of California determined that this group of cases was appropriate for coordination and assigned the group to the Superior Court of California, Los Angeles County, for pretrial purposes, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. In the second quarter of 2020, Altria and its subsidiaries filed motions to dismiss certain claims in these cases, including the federal RICO claim, and no case in which Altria or any of its subsidiaries is named has been set for trial, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020. Juul Labs, Inc. also is named in a significant number of additional individual and class action lawsuits to which neither Altria nor any of its subsidiaries is currently named, according to Altria in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020.

Claims involving e-cigarettes and vapor products have been filed following deaths and injuries from using such products. The CDC has reported deaths and injuries from a vaping-related lung disease, although the CDC has noted that the harmful chemical found to be present in cases of such lung disease is used as an additive in vaping products containing THC (a chemical found in cannabis), and the CDC has recommended that people do not use e- cigarettes containing THC.

On February 12, 2020 the Attorney General of Massachusetts sued Juul Labs, Inc. in state court, accusing the company of deliberately targeting young people through its marketing campaigns and alleging that the company’s misconduct has created a public health crisis and an epidemic of youth nicotine use and addiction. According to the complaint, the company’s e-cigarettes cause underage consumers to absorb large amounts of nicotine, a toxic and addictive substance that is especially detrimental to the health of adolescents and young adults. The complaint alleges that Juul Labs, Inc. bought advertisements on websites designed for teens and children, as well as websites aimed at helping middle and high school students with math and social studies, and that Juul Labs, Inc. tried to recruit celebrities and social media influencers who were popular among young people to tout their products. The lawsuit also alleges that Juul Labs, Inc. has sold and shipped its e-vapor products without age verification. According to news accounts, at least three other states, including Pennsylvania, New York and California, have filed similar lawsuits against Juul Labs, Inc. On February 25, 2020, 39 state attorneys general announced a joint investigation into whether Juul Labs, Inc. is marketing its products to children. The investigation will also examine Juul Labs, Inc.’s claims about its products’ nicotine content and their effectiveness in helping longtime smokers quit. Altria reported in its Form 10-Q filed with the SEC for the six-month period ended June 30, 2020 that Juul Labs, Inc. is currently under investigation by various federal and state agencies, including the FDA and the FTC, and state attorneys general, and that such investigations vary in scope but at least some appear to include Juul Labs, Inc.’s marketing practices, particularly as such practices relate to youth.

Other Litigation

By way of example only, and not as an exclusive or complete list, the following are additional types of tobacco-related litigation which the tobacco industry is also the target of: (a) asbestos contribution cases, where asbestos manufacturers and related parties seek contribution or reimbursement where asbestos claims were allegedly caused in whole or in part by cigarette smoking, (b) patent infringement claims, (c) “ignition propensity cases” where wrongful death actions contend fires caused by cigarettes led to other individuals’ deaths, (d) “filter cases” which mostly have been filed against Lorillard for alleged exposure to asbestos fibers that were incorporated into filter material used in one brand of cigarettes manufactured by Lorillard over 50 years ago, (e) claims related to smokeless tobacco products, (f) ERISA claims, (g) antitrust claims and (h) employment litigation claims. Tobacco manufacturers are also subject to international litigation.

316 Defenses

The PMs have stated that they believe that they have valid defenses to the cases pending against them as well as valid bases for appeal should any adverse verdicts be returned against them. While PMs have indicated their intent to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any litigation. Litigation is subject to many uncertainties. Plaintiffs have prevailed in several cases, as noted herein, and it is possible that one or more of the pending actions could be decided unfavorably as to the PMs or the other defendants. The PMs may enter into discussions in an attempt to settle particular cases if the PMs believe it is appropriate to do so.

Some plaintiffs have been awarded damages from cigarette manufacturers at trial. While some of these awards have been overturned or reduced, other damages awards have been paid after the manufacturers have exhausted their appeals. These awards and other litigation activities against cigarette manufacturers and health issues related to tobacco products also continue to receive media attention. It is possible, for example, that the 2006 verdict in the DOJ case, which made many adverse findings regarding the conduct of the defendants, could form the basis of allegations by other plaintiffs or additional judicial findings against cigarette manufacturers. In addition, the U.S. Supreme Court ruling in Good v. Altria could result in further “lights” litigation. Any such developments could have material adverse effects on the ability of the PMs to prevail in smoking and health litigation and could influence the filing of new suits against the PMs. The type or extent of litigation that could be brought against PMs in the future cannot be predicted.

The foregoing discussion of civil litigation against the domestic tobacco industry is not exhaustive and is not based upon the examination or analysis by the Agency of the court records of the cases mentioned or of any other court records. It is based on SEC filings by Altria (as well as certain prior SEC filings of other OPMs) and on other publicly available information published by the OPMs or others. Prospective purchasers of the Series 2020 Bonds are referred to such SEC filings and applicable court records for additional descriptions thereof.

Litigation is subject to many uncertainties, and it is not possible to predict the outcome of litigation or estimate the possible loss or range of loss to the tobacco manufacturers. Altria has stated in its SEC filings that damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, have ranged in the billions of dollars. Altria has further stated in its SEC filings that it is possible that the consolidated results of operations, cash flows or financial position of itself or one or more of its subsidiaries could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. It can be expected that at any time and from time to time there will be developments in the litigation currently pending and filing of new litigation that could materially adversely affect the business of the PMs and the market for or prices of securities such as the Series 2020 Bonds payable from tobacco settlement payments made by the PMs under the MSA.

317 SUMMARY OF THE TOBACCO CONSUMPTION REPORT [to be revised upon receipt]

The following is a brief summary of the Tobacco Consumption Report, a copy of which is attached hereto as APPENDIX A. This summary does not purport to be complete, and the Tobacco Consumption Report should be read in its entirety for an understanding of the assumptions on which it is based and the conclusions it reaches. The Tobacco Consumption Report forecasts future United States cigarette consumption. The MSA payments are based in large part on cigarettes shipped in and to the United States. Cigarette shipments and cigarette consumption may not match as a result of various factors such as inventory adjustments, but are substantially the same when compared over a period of time. IHS Global’s forecasts, including, but not limited to, the forecast regarding future cigarette consumption, are estimates, which have been prepared by IHS Global on the basis of certain assumptions and hypotheses. No representation or warranty of any kind is or can be made with respect to the accuracy or completeness of and no representation or warranty should be inferred from, these forecasts. The cigarette consumption forecast contained in the Tobacco Consumption Report is based upon assumptions as to future events and, accordingly, is subject to varying degrees of uncertainty. Some assumptions inevitably will not materialize and, additionally, unanticipated events and circumstances may occur. Therefore, for example, actual cigarette consumption inevitably will vary from the forecast included in the Tobacco Consumption Report and the variations may be material and adverse. No assurance can be given that actual cigarette consumption in the United States during the term of the Series 2020 Bonds will be as assumed. See “RISK FACTORS” herein.

General

IHS Global prepared the Tobacco Consumption Report for the Agency. IHS Global provided the following description to the Agency for use in this Offering Circular: “IHS Global is an internationally recognized econometric and forecasting firm with over 600 economists located in more than 30 countries. IHS Global is a subsidiary of IHS Markit, Inc., a publicly traded company on the NASDAQ (NASDAQ: INFO). IHS Markit is a leading source of information, insight and advisory services in the areas of finance, economics, energy, chemicals, technology, transportation, healthcare, geopolitical risk, sustainability and supply chain management.”

IHS Global has developed an econometric model of cigarette consumption in the United States based on historical United States data between 1965 and 2019, and what IHS Global describes as widely accepted economic principles and IHS Global’s experience in building econometric forecasting models. IHS Global considered the impact of demographics, cigarette prices, disposable income, employment and unemployment, industry advertising expenditures, the future effect of the incidence of smoking amongst underage youth, and qualitative variables that captured the impact of anti-smoking regulations, legislation, health warnings, and the availability of alternative tobacco and nicotine products. After determining which variables were effective in building this cigarette consumption model (including real cigarette prices, real per capita disposable personable income, the impact of workplace smoking restrictions, stricter restrictions on smoking in public places, the rapid increase in consumption of electronic cigarettes, and the trend over time in individual behavior and preferences), IHS Global employed standard multivariate regression analysis to determine the nature of the economic relationship between these variables and per capita cigarette consumption in the United States.

IHS Global’s model, coupled with its long-term forecast of the United States economy, was then used to project total United States cigarette consumption from 2020 through 2055 (the “Tobacco Consumption Forecast”). The Tobacco Consumption Forecast indicates that the total consumption of cigarettes in the United States is projected to fall at an average annual rate of 3.3% from 2020 through 2055, resulting in a forecast of total U.S. cigarette consumption in 2055 of 68.3 billion cigarettes including a roll-your-own equivalent of 0.0325 ounces per cigarette (a 70% decline from the 2019 level), as set forth in the Tobacco Consumption Report. According to IHS Global, the assumptions on which the Tobacco Consumption Forecast is based are reasonable.

Historical Cigarette Consumption

The U.S. Department of Agriculture, which has compiled data on cigarette consumption since 1900, reports that consumption (which is defined as taxable United States consumer sales, plus shipments to overseas armed forces, ship stores, Puerto Rico and other United States possessions, and small tax-exempt categories, as reported by the Bureau of Alcohol, Tobacco, Firearms and Explosives) grew from 2.5 billion in 1900 to a peak of 640 billion in 1981.

318 Following the release of the Surgeon General’s Report in 1964, cigarette consumption continued to increase at an average annual rate of 1.2% between 1965 and 1981. Between 1981 and 1990, however, U.S. cigarette consumption declined at an average annual rate of 2.2%. From 1990 to 1998, the average annual rate of decline in cigarette consumption was 1.5%; but for 1998 the decline increased to 3.1% and increased further to 6.5% for 1999. These declines are correlated with large price increases in 1998 and 1999 following the MSA and the Previously Settled States Settlements. In 2000 and 2001, the rate of decline moderated to 1.2%. In 2002 and 2003, coincident with many state excise tax increases, the rate of decline accelerated to an average annual rate of 3.0%. The decline rate moderated for the next four years, through 2007, averaging 2.3%. The rate of decline accelerated dramatically in 2008 through 2010 (due to indoor smoking bans, recession and the increases in the federal and state excise taxes), before finally decelerating in 2011 and 2012. In 2013 the decline sharpened to nearly 5%. This decline has been attributed by the industry to a weak economy, the rapid increase in usage of electronic cigarettes, and to an unfavorable comparison with a surprisingly strong 2012. In addition, some of the decline was due to a reduction in wholesale inventories late in the year, some of which was reversed in 2014. In 2015, cigarette shipment declines stopped, and manufacturers reported increased shipments for most of the year. Cigarette shipment decline resumed in 2016 and continued in 2017- 2019. NAAG reported an industry volume decline in 2019 of 5.0%.

Factors Affecting Cigarette Consumption

Most empirical studies have found a common set of variables that are relevant in building a model of cigarette demand. These conventional analyses usually evaluate one or more of the following factors: (i) general population growth, (ii) price increases, (iii) changes in disposable income, (iv) youth consumption, (v) trend over time, (vi) workplace smoking bans, (vii) smoking bans in public places, (viii) nicotine dependence, and (ix) health warnings. While some of these factors were not found to have a measurable impact on changes in demand for cigarettes, all of these factors are thought to affect smoking in some manner and to be incorporated into current levels of consumption. IHS Global’s analysis includes a time trend variable in order to capture the impact of changing health trends and the effects of other such variables, which are difficult to quantify. In addition, IHS Global has added to its forecast the impact of electronic cigarette use, which has significantly increased the cigarette consumption rate of decline and is expected to continue to do so, and the raising of the minimum legal age to 21 to purchase cigarettes in the U.S. beginning in 2020.

Comparison with Prior Forecast

On February 3, 2006, IHS Global presented a study to the Agency, in which IHS Global’s base case forecast projected that total consumption in 2045 would be 188 billion cigarettes, a 53% decline from the 2003 level. From 2004 through 2045 the average annual rate of decline was projected to be 1.78%. The current forecast projects an average decline rate, from 2003, of 3.4% through 2045, with a projected annual consumption level of 94.7 billion cigarettes in such year. The current forecast was developed with consideration of the large federal tax increase in 2009, the negative effects of the proliferation of smoking ban legislation across the U.S., and the introduction and expansion of e-cigarette use this decade.

DEPARTMENT OF FINANCE POPULATION FORECAST

Projections of County population are based on the Population Forecast published by the Department of Finance in January 2020. The Department of Finance is not an independent econometric consultant.

The Population Forecast and related materials (including assumptions and methodology) are available by accessing the following website of the Department of Finance:

http://www.dof.ca.gov/Forecasting/Demographics/projections/

The Population Forecast and the materials published by the Department of Finance in connection therewith, including the Department of Finance’s methodology and assumptions, are accessible at the website specified above, and should be read in their entirety for an understanding of the assumptions on which the Population Forecast is based and the conclusions it reaches. The projections are estimates which have been prepared by the Department of Finance

319 on the basis of certain assumptions and hypotheses. No representation or warranty of any kind is or can be made with respect to the accuracy or completeness of, and no representation or warranty should be inferred from, these projections. The Population Forecast is based upon assumptions as to future events and, accordingly, is subject to varying degrees of uncertainty. Some assumptions inevitably will not materialize and, additionally, unanticipated events and circumstances may occur. Therefore, for example, actual State and County population inevitably will vary from the Population Forecast and the variations may be material and adverse to the County. No assurance can be given that actual population of the State and the County during the term of the Series 2020 Bonds will be as assumed, or that the other assumptions underlying the Population Forecast will be consistent with future events.

CONTINUING DISCLOSURE UNDERTAKING

In order to assist the Underwriter in complying with Rule 15c2-12 (the “Rule”) of the SEC promulgated under the Securities Exchange Act of 1934, as amended, the Agency will execute a Continuing Disclosure Certificate (the “Continuing Disclosure Undertaking”) for the benefit of the holders and beneficial owners of the Series 2020 Bonds. Pursuant to the Continuing Disclosure Undertaking, the Agency will provide, or cause to be provided by a dissemination agent, to the Municipal Securities Rulemaking Board, on its Electronic Municipal Market Access (“EMMA”) system, certain annual financial information and operating data and, in a timely manner, notices of the occurrence of certain events specified therein. See APPENDIX H — “FORM OF CONTINUING DISCLOSURE UNDERTAKING.”

The Series 2006 Bonds were the subject of a continuing disclosure undertaking by the Agency, and the Agency has continuing disclosure undertakings in effect with respect to other outstanding indebtedness, pursuant to which the Agency is required to provide, within 210 days after the end of each fiscal year, an annual report containing certain annual financial information (including audited financial statements) and operating data and, in a timely manner, notices of the occurrence of certain events specified therein. The Agency’s audited financial statements are based in part on the audited financial statements of each of its Members. Consequently, the Agency’s audited financial statements cannot be completed until the Agency receives each of the audited financial statements of its Members. There are currently nine Members of the Agency (including the County). See “THE AGENCY” herein. During the last five years, while the Agency timely filed its annual operating data, the Agency was 226 days late, 212 days late, 154 days late, 61 days late, 116 days late and 80 days late in filing its audited financial statements for fiscal years 2014, 2015, 2016, 2017, 2018 and 2019, respectively. Financial information relating to the Corporation and the Bonds is included in the County’s Comprehensive Annual Financial Reports, which the County includes on its website when completed.

LITIGATION

There is no litigation pending in any State or federal court to restrain or enjoin the issuance or delivery of the Series 2020 Bonds or questioning the creation, organization or existence of the Agency or the Corporation, the validity or enforceability of the Indenture, the Loan Agreement, the Sale Agreement or the sale of the County Tobacco Assets by the County to the Corporation, the proceedings for the authorization, execution, authentication and delivery of the Series 2020 Bonds or the validity of the Series 2020 Bonds. For a discussion of other legal matters, including certain pending litigation involving the MSA and the PMs, see “RISK FACTORS,” “CERTAIN INFORMATION RELATING TO THE DOMESTIC TOBACCO INDUSTRY” and “LEGAL CONSIDERATIONS” herein.

TAX MATTERS

Federal Tax Exemption

In the opinion of Norton Rose Fulbright US LLP, San Francisco, California, Bond Counsel to the Agency, under existing statutes, regulations, rulings and judicial decisions, and assuming compliance by the Agency, the Corporation and the County with certain covenants in the Indenture and other documents pertaining to the Series 2020 Bonds and requirements of the Internal Revenue Code of 1986, as amended (the “Code”), regarding the use, expenditure and investment of proceeds of the Series 2020 Bonds and the timely payment of certain investment

320 earnings to the United States, interest on the Series 2020 Bonds is not included in the gross income of the owners of the Series 2020 Bonds for federal income tax purposes. Failure to comply with such covenants and requirements may cause interest on the Series 2020 Bonds to be included in gross income retroactive to the date of issuance of the Series 2020 Bonds.

In the further opinion of Bond Counsel, interest on the Series 2020 Bonds is not treated as an item of tax preference for purposes of the federal alternative minimum tax.

Ownership of, or the receipt of interest on, tax-exempt obligations may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with excess passive income, individual recipients of Social Security or Railroad Retirement benefits, taxpayers that may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and taxpayers who may be eligible for the earned income tax credit. Bond Counsel expresses no opinion with respect to any collateral tax consequences and, accordingly, prospective purchasers of the Series 2020 Bonds should consult their tax advisors as to the applicability of any collateral tax consequences.

Certain requirements and procedures contained or referred to in the Indenture, the Tax Certificate or other documents pertaining to the Series 2020 Bonds may be changed, and certain actions may be taken or not taken, under the circumstances and subject to the terms and conditions set forth in such documents, upon the advice or with the approving opinion of counsel nationally recognized in the area of tax-exempt obligations. Bond Counsel expresses no opinion on the effect of any action taken or not taken in reliance upon an opinion of other counsel regarding federal, state or local tax matters, including, without limitation, exclusion from gross income for federal income tax purposes of interest on the Series 2020 Bonds.

Bond Counsel’s opinion is not a guarantee of result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and judicial decisions and the representations and covenants of the Agency described above. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to the matters addressed in the opinion of Bond Counsel, and Bond Counsel’s opinion is not binding on the IRS. The IRS has an ongoing program of examining the tax-exempt status of the interest on municipal obligations. If an examination of the Series 2020 Bonds is commenced, under current procedures the IRS is likely to treat the Agency as the “taxpayer,” and the owners of the Series 2020 Bonds would have no right to participate in the examination process. In responding to or defending an examination of the tax-exempt status of the interest on the Series 2020 Bonds, the Agency may have different or conflicting interests from the owners. Additionally, public awareness of any future examination of the Series 2020 Bonds could adversely affect the value and liquidity of the Series 2020 Bonds during the pendency of the examination, regardless of its ultimate outcome.

Tax Accounting Treatment of Bond Premium and Original Issue Discount

Bond Premium. To the extent a purchaser acquires a Series 2020 Bond at a price in excess of the amount payable at its maturity, such excess will constitute “bond premium” under the Code. The Code and applicable Treasury Regulations provide generally that bond premium on a tax-exempt obligation is amortized over the remaining term of the obligation (or a shorter period in the case of certain callable obligations) based on the obligation's yield to maturity (or shorter period in the case of certain callable obligations). The amount of premium so amortized reduces the owner’s basis in such obligation for federal income tax purposes, though such amortized premium is not deductible for federal income tax purposes. This reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of the obligation. Bond Counsel is not opining on the accounting for bond premium or the consequence to a Series 2020 Bond purchaser of purchasing a Series 2020 Bond with bond premium. Persons considering the purchase of Series 2020 Bonds with bond premium should consult with their tax advisors with respect to the determination of bond premium on such Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of such Bonds.

Original Issue Discount. The excess, if any, of the stated redemption price at maturity of a Series 2020 Bond of a particular maturity over the initial offering price to the public of such Series 2020 Bond of that maturity at which a substantial amount of the Series 2020 Bonds of that maturity is sold to the public is “original issue discount.”

321 Original issue discount accruing on a Series 2020 Bond is treated as interest excluded from the gross income of the owner thereof for federal income tax purposes under the same conditions and limitations as are applicable to interest payable on such Bond. Original issue discount on a Series 2020 Bond or a particular maturity purchased pursuant to the initial public offering at the initial public offering price at which a substantial amount of the Series 2020 Bonds of that maturity is sold to the public accrues on a semiannual basis over the term of the Series 2020 Bond on the basis of a constant yield; and within each semiannual period accrues on a ratable daily basis. The amount of original issue discount on a Series 2020 Bond accruing during each period is added to the adjusted basis of such Bond, which will affect the amount of taxable gain upon disposition (including sale, redemption or payment on maturity) of such Bond. The Code includes certain provisions relating to the accrual of original issue discount in the case of purchasers that purchase Series 2020 Bonds other than at the initial offering price.

Bond Counsel is not opining on the accounting for or consequence to a Series 2020 Bond purchaser of bond premium or original issue discount. Accordingly, persons considering the purchase of Series 2020 Bonds with bond premium or original issue discount should consult with their tax advisors with respect to the determination of bond premium or original issue discount on such Bonds for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of such Bonds.

Information Reporting and Backup Withholding

Interest paid on the Series 2020 Bonds will be subject to information reporting in a manner similar to interest paid on taxable obligations. Although such reporting requirement does not, in and of itself, affect the excludability of such interest from gross income for federal income tax purposes, such reporting requirement causes the payment of interest on the Series 2020 Bonds to be subject to backup withholding if such interest is paid to beneficial owners who (a) are not “exempt recipients,” and (b) either fail to provide certain identifying information (such as the beneficial owner’s taxpayer identification number) in the required manner or have been identified by the IRS as having failed to report all interest and dividends required to be shown on their income tax returns. Generally, individuals are not exempt recipients, whereas corporations and certain other entities are exempt recipients. Amounts withheld under the backup withholding rules from a payment to a beneficial owner are allowed as a refund or credit against such beneficial owner’s federal income tax liability so long as the required information is furnished to the IRS.

State Tax Exemption

In the further opinion of Bond Counsel, interest on the Series 2020 Bonds is exempt from personal income taxes imposed by the State of California.

Future Developments

Existing law may change to reduce or eliminate the benefit to owners of the Series 2020 Bonds of the exclusion of the interest on the Series 2020 Bonds from gross income for federal income tax purposes or of the exemption of interest on the Series 2020 Bonds from State of California personal income taxation. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Series 2020 Bonds. Prospective purchasers of the Series 2020 Bonds should consult with their tax advisors with respect to any proposed or future change in tax law.

A copy of the form of opinion of Bond Counsel relating to the Series 2020 Bonds is included in APPENDIX E hereto.

RATINGS

It is a condition to the obligation of the Underwriter to purchase the Series 2020 Bonds that, at the date of delivery thereof to the Underwriter, S&P Global Ratings (together with its predecessor organizations, “S&P”) has assigned a rating of “[A] (sf)” to the Series 2020A Senior Bonds maturing June 1, [___]* through June 1, [___]*; a rating of “[A-] (sf)” to the Series 2020A Senior Bonds maturing June 1, [___]* through June 1, [___]*;a rating of

* Preliminary, subject to change.

322 “[____] (sf)” to the Series 2020A Senior Bonds maturing June 1, [___]*, a rating of “[____] (sf)” to the Series 2020B- 1 Subordinate Bonds maturing June 1, [___]*; and a rating of“[____] (sf)” to the Series 2020B-1 Subordinate Bonds maturing June 1, [___]*. The Series 2020B-2 Subordinate Bonds are not rated and involve additional risks that may not be appropriate for certain investors. See “RISK FACTORS—Market for Series 2020B Subordinate Bonds; No Credit Rating on Series 2020B Subordinate Bonds.”

According to the S&P ratings guide, (a) the “sf” identifier shall be assigned to ratings on “structured finance instruments” when required to comply with applicable law or regulatory requirement or when S&P believes it appropriate, and (b) the addition of the “sf” identifier to a rating does not change that rating’s definition or S&P’s opinion about the issue’s creditworthiness.

The ratings address S&P’s assessment of the ability of the Agency to pay (i) interest on the Series 2020A Senior Bonds and Series 2020B-1 Subordinate Bonds, when due, and (ii) principal of the Series 2020A Senior Bonds and Series 2020B-1 Subordinate Bonds by their Maturity Dates and, with respect to the Series 2020A Senior Bonds that are Term Bonds, Sinking Fund Installment dates. The ratings do not address the payment of Turbo Redemptions on the Series 2020B-1 Subordinate Bonds. The ratings of the Series 2020A Senior Bonds and Series 2020B-1 Subordinate Bonds by S&P reflect only the views of such organization and any desired explanation of the significance of such ratings and any outlooks or other statements given by S&P with respect thereto should be obtained from S&P at the following address: S&P Global Ratings, 55 Water Street, New York, New York 10041.

There is no assurance that the initial ratings assigned to the rated Series 2020 Bonds will continue for any given period of time or that any of such ratings will not be revised downward, suspended or withdrawn entirely by S&P. Any such downward revision, suspension or withdrawal of such ratings may have an adverse effect on the availability of a market for or the market prices of the rated Series 2020 Bonds.

VERIFICATION OF MATHEMATICAL COMPUTATIONS

Upon delivery of the Series 2020 Bonds, the arithmetical accuracy of certain computations included in the schedules relating to the adequacy of the amounts to be applied to the refunding and defeasance of the Series 2006 Bonds will be verified by Causey Demgen & Moore P.C., independent certified public accountants (the “Verification Agent”). In addition, the Verification Agent will verify the arithmetical accuracy of certain computations included in the schedules relating to the projections of debt service coverage of the Series 2020 Bonds and breakeven consumption declines under various consumption decline scenarios. The verifications will be based solely upon information and assumptions supplied to the Verification Agent. The Verification Agent has not made a study or evaluation of the information and assumptions on which such computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions or the achievability of the projected outcome.

UNDERWRITING

Stifel Nicolaus & Company, Incorporated, the sole underwriter for the Series 2020 Bonds (the “Underwriter”), has agreed, subject to certain conditions, to purchase all, but not less than all, of the Series 2020 Bonds from the Agency at an underwriter’s discount of $______. The Underwriter will be obligated to purchase all of the Series 2020 Bonds if any are purchased. The initial public offering prices of the Series 2020 Bonds may be changed from time to time by the Underwriter. The Series 2020 Bonds may be offered and sold to certain dealers (including the Underwriter and other dealers depositing Series 2020 Bonds into investment trusts) at prices lower than such public offering prices.

The Underwriter and its affiliates are full-service financial institutions engaged in various activities that may include securities trading, commercial and investment banking, municipal advisory, brokerage, and asset management. In the ordinary course of business, the Underwriter and its affiliates may actively trade debt and, if applicable, equity securities (or related derivative securities) and provide financial instruments (which may include bank loans, credit support or interest rate swaps). The Underwriter and its affiliates may engage in transactions for their own accounts involving the securities and instruments made the subject of this securities offering or other offering of the Agency. The Underwriter and its affiliates may make a market in credit default swaps with respect to municipal securities in

323 the future. The Underwriter and its affiliates may also communicate independent investment recommendations, market color or trading ideas and publish independent research views in respect of this securities offering or other offerings of the Agency.

LEGAL MATTERS

The validity of the Series 2020 Bonds and certain other legal matters are subject to the approving opinion of Norton Rose Fulbright US LLP, as Bond Counsel to the Agency. A complete copy of the proposed form of opinion of Bond Counsel is contained in APPENDIX E hereto. Certain legal matters will be passed upon for the Agency, the Corporation and the County by County Counsel, as issuer’s counsel to the Agency, counsel to the Corporation and counsel to the County, respectively. Certain legal matters will be passed upon for the Agency Norton Rose Fulbright US LLP, as Disclosure Counsel to the Agency, and for the Underwriter by its counsel, Hawkins Delafield & Wood LLP. Norton Rose Fulbright US LLP also acts as general counsel to the Agency.

OTHER PARTIES

IHS Global

IHS Global has been retained on behalf of the Agency as an independent econometric consultant. The Tobacco Consumption Report attached as APPENDIX A is included herein in reliance on IHS Global as experts in such matters. IHS Global’s fees for acting as independent econometric consultant are not contingent upon the issuance of the Series 2020 Bonds. The Tobacco Consumption Report should be read in its entirety.

Municipal Advisor

Del Rio Advisors, LLC (“Del Rio ”) has retained to act as municipal advisor to the County in connection with the issuance of the Series 2020 Bonds. Del Rio is an independent municipal advisory firm and is not engaged in the business of underwriting municipal bonds or other securities. Del Rio is not obligated to undertake, and has not undertaken to make, an independent verification or assume responsibility for the accuracy, completeness, or fairness of the information contained in this Offering Circular.

THE CALIFORNIA COUNTY TOBACCO SECURITIZATION AGENCY

By:

324 APPENDIX A

TOBACCO CONSUMPTION REPORT

325 APPENDIX B

MASTER SETTLEMENT AGREEMENT

326

APPENDIX C

NPM ADJUSTMENT SETTLEMENT AGREEMENT AND 2016 AND 2017 NPM ADJUSTMENTS SETTLEMENT AGREEMENT AND 2018 THROUGH 2022 NPM ADJUSTMENTS SETTLEMENT SETTLEMENT AGREEMENT

327 APPENDIX D

THE CALIFORNIA CONSENT DECREE, THE MOU, THE ARIMOU AND THE CALIFORNIA ESCROW AGREEMENT

328 APPENDIX E

PROPOSED FORM OF OPINION OF BOND COUNSEL

______, 2020

The California County Tobacco Securitization Agency Alameda, California

Re: The California County Tobacco Securitization Agency Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020

Ladies and Gentlemen:

We have acted as bond counsel to The California County Tobacco Securitization Agency (the “Agency”) in connection with the Agency’s issuance of its $______aggregate principal amount of The California County Tobacco Securitization Agency Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020A (Senior), its $______aggregate initial principal amount of The California County Tobacco Securitization Agency Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-1 (Subordinate) and $______aggregate initial principal amount of The California County Tobacco Securitization Agency Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-2 (Subordinate) (collectively, the “Bonds”). The Agency was created by Placer County, California (the “County”), and the California Counties of Stanislaus, Merced, Kern, Marin, Sonoma, Fresno, Los Angeles and Alameda, pursuant to a Joint Exercise of Powers Agreement, dated as of November 15, 2000, as amended (the “JPA Agreement”), in accordance with Chapter 5 of Division 7 of Title 1 of the Government Code of the State of California (the “JPA Act”), which includes the Marks-Roos Local Bond Pooling Act of 1985.

The Bonds are being issued pursuant to an Amended and Restated Indenture, entered into as of June 1, 2002, as amended and restated as of June 1, 2006 and as further amended and restated as of ______1, 2020 (the “Master Indenture”), as supplemented by the Series 2020 Supplement, dated as of ______1, 2020 (the “2020 Supplement”; the Master Indenture, as so supplemented, being herein referred to as the “Indenture”), each by and between the Agency and The Bank of New York Mellon Trust Company, N.A., successor Indenture Trustee (the “Indenture Trustee”). Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Indenture.

Pursuant to a Sale Agreement entered into as of June 1, 2002, as amended and restated as of June 1, 2006 (the “Sale Agreement”), by and between Gold Country Settlement Funding Corporation (the “Corporation”) and the County of Placer, California (the “County”), the County sold to the Corporation, and the Corporation purchased from the County, the “County Tobacco Assets,” which consist of all of the County’s right, title and interest in, to and under the MOU, the ARIMOU, the MSA and the Consent Decree, including, without limitation, the rights of the County to be paid the money due to it under the MOU, the ARIMOU, the MSA and the Consent Decree from and after May 1, 2003.

Pursuant to an Amended and Restated Secured Loan Agreement, entered into as of entered into as of June 1, 2002 as amended and restated as of June 1, 2006 and as further amended and restated as of ______1, 2020 (the “Loan Agreement”), the Agency will loan the proceeds of the Bonds to the Corporation, which will apply the proceeds of such loan to, among other things, effect the refunding of the Agency’s Tobacco Settlement Asset- Backed Bonds (Gold Country Settlement Funding Corporation) Series 2006.

The Bonds are dated, bear or accrete interest, mature, are subject to redemption and are secured as set forth in the Indenture. We assume the parties will perform in all material respects their respective covenants in the Indenture and the Loan Agreement. The Bonds will be limited obligations of the Agency, secured solely by a pledge and assignment of the Loan Repayments under the Loan Agreement (derived from payments on the County Tobacco Assets), together with certain funds to be held under the Indenture.

329 In connection with our opinion, we have examined the JPA Act and certified copies of proceedings of the Agency relating to the issuance of the Bonds, including the Resolution adopted by the Agency on September 15, 2020, the Resolution adopted by the County Board of Supervisors on ______, 2020, the Resolution of the Board of Directors of the Corporation adopted on ______, 2020, and such other documents, records and instruments, including counterparts or certified copies of the Indenture, the Loan Agreement and the Sale Agreement, as we deemed necessary to enable us to express the opinions set forth below. We have assumed, without undertaking to verify, the genuineness of all documents, certificates and opinions presented to us (whether as originals or as copies) and of the signatures thereon, the accuracy of the factual matters represented, warranted or certified therein, and the due and legal execution thereof by, and the validity against, any parties other than the Agency.

Based on the foregoing and our examination of existing constitutional, statutory and decisional law, such legal proceedings and such other documents as we deem necessary to render the following opinions, we are of the opinion that:

1 The Loan Agreement has been duly and legally authorized, executed and delivered by the Agency and the Corporation and is a valid and binding agreement of each of them in accordance with its terms.

2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Issuer. The Indenture creates, to secure the payment of the Bonds, a valid pledge of the Collateral, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture.

3. The Bonds have been duly authorized and issued by the Agency under the Indenture, and are valid, legal and binding limited obligations of the Agency.

4. Under existing statutes, regulations, rulings and judicial decisions, (i) assuming compliance by the Issuer, the Corporation and the County with certain covenants in the Indenture and other documents pertaining to the Bonds and requirements of the Internal Revenue Code of 1986, as amended (the “Code”), regarding the use, expenditure and investment of proceeds of the Bonds and the timely payment of certain investment earnings to the United States, interest on the Bonds is not included in the gross income of the owners of the Bonds for federal income tax purposes and (ii) interest on the Bonds is not treated as an item of tax preference for purposes of the federal alternative minimum tax. Failure to comply with such covenants and requirements may cause interest on the Bonds to be included in gross income retroactive to the date of issuance of the Bonds.

5. Under existing law, interest on the Bonds is exempt from personal income taxes imposed by the State of California.

We express no opinion as to any collateral tax consequences resulting from the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. In addition, we express no opinion on the effect of any action taken or not taken in reliance upon an opinion of other counsel regarding federal, state or local tax matters, including, without limitation, the exclusion from gross income for federal income tax purposes of interest on the Bonds.

As to questions of fact material to our opinion and the requirements of the Code and regulations thereunder, we have relied upon representations of, and assumed compliance with covenants by the Corporation, the Agency and the County contained in the Indenture, the Loan Agreement, the Sale Agreement and the Tax Certificates, certificates of public officials and certificates of representatives of the County, the Corporation and the Agency, without undertaking any independent verification. For purposes of our opinion in paragraph 2, we have also assumed, without undertaking to verify, the accuracy of the Agency’s certification that it has not previously pledged or created a lien on or security interest in the Collateral or other amounts held by the Indenture Trustee under the Indenture.

With respect to the opinions expressed herein, the rights and obligations under the Bonds, the Indenture, the Loan Agreement and the Sale Agreement are subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting the creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations on

330 legal remedies against joint exercise of powers authorities in the State. In addition, we express no opinion with respect to indemnification, contribution, penalty, choice of law, choice of forum or waiver provisions contained in the foregoing documents.

Finally, we undertake no responsibility for the accuracy, completeness and fairness of the Offering Circular or other offering material relating to the Bonds and express no opinion relating thereto. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions. Such opinions may be adversely affected by actions taken or events occurring, including a change in law, regulation or ruling (or in the application or official interpretation of any law, regulation or ruling) after the date hereof. We have not undertaken to determine, or to inform any person, whether such actions are taken or such events occur and we have no obligation to update this opinion in light of such actions or events.

Respectfully submitted,

[To be signed, “Norton Rose Fulbright US LLP”]

331 APPENDIX F-1

FORM OF INDENTURE AND SERIES 2020 SUPPLEMENT

332 APPENDIX F-2

FORM OF LOAN AGREEMENT

333 APPENDIX F-3

SALE AGREEMENT

334 APPENDIX G

BOOK-ENTRY ONLY SYSTEM

The information in this Appendix G concerning DTC and DTC’s book-entry system has been obtained from DTC, and the Agency, the Corporation, the County, the Indenture Trustee and the Underwriter take no responsibility for the completeness or accuracy thereof. The Agency, the Corporation, the County, the Indenture Trustee and the Underwriter cannot and do not give any assurances that DTC, Direct Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of principal or Accreted Value of and interest on the Series 2020 Bonds, (b) certificates representing ownership interest in or other confirmation of ownership interest in the Series 2020 Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Series 2020 Bonds, or that they will do so on a timely basis, or that DTC, Direct Participants or Indirect Participants will act in the manner described in this Appendix G. The current “Rules” applicable to DTC are on file with the SEC and the current “Procedures” of DTC to be followed in dealing with DTC participants are on file with DTC.

The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Series 2020 Bonds. The Series 2020 Bonds will be issued as fully-registered securities bonds registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Series 2020 Bond will be issued for each maturity of the Series 2020 Bonds of each series, each in the aggregate principal amount or final Accreted Value of such maturity of such series, and will be deposited with or for the account of DTC.

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com; nothing contained in such website is incorporated into this Offering Circular.

Purchases of Series 2020 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2020 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2020 Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2020 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive definitive Series 2020 Bonds, except in the event that use of the book-entry system for the Series 2020 Bonds is discontinued.

To facilitate subsequent transfers, all Series 2020 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2020 Bonds with DTC and their registration in the name of

335 Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2020 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2020 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Series 2020 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2020 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Series 2020 Bond documents. For example, Beneficial Owners of Series 2020 Bonds may wish to ascertain that the nominee holding the Series 2020 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Series 2020 Bonds of any maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2020 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Agency as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Series 2020 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments of principal or Accreted Value of and premium, if any, and interest on the Series 2020 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Agency or the Indenture Trustee, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Indenture Trustee or the Agency, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal or Accreted Value of and premium, if any, and interest on the Series 2020 Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Indenture Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

NONE OF THE AGENCY, THE CORPORATION, THE COUNTY, THE UNDERWRITER AND THE INDENTURE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF SERIES 2020 BONDS FOR PREPAYMENT OR REDEMPTION.

DTC may discontinue providing its services as depository with respect to the Series 2020 Bonds at any time by giving reasonable notice to the Agency or the Indenture Trustee. Under such circumstances, in the event that a successor depository is not obtained, definitive Series 2020 Bonds are required to be printed and delivered. To the extent permitted by law, the Agency may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, definitive Series 2020 Bonds will be printed and delivered. In the event that the book-entry system is discontinued as described above, the requirements of the Indenture relating, among other things, to payments on the Series 2020 Bonds and their registration of transfer and exchange, will apply.

So long as Cede & Co. is the registered owner of the Series 2020 Bonds, as nominee for DTC, references in this Offering Circular to Owners or registered owners of the Series 2020 Bonds (other than under the caption “TAX

336 MATTERS”) shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners of the Series 2020 Bonds.

337 APPENDIX H

FORM OF CONTINUING DISCLOSURE UNDERTAKING

CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the “Disclosure Certificate”) is dated as of ______, 2020 and is executed and delivered by The California County Tobacco Securitization Agency (the “Agency”) in connection with the issuance of the Agency’s $______Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020A (Senior) (the “Series 2020A Senior Bonds”), $______Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-1 (Subordinate) (the “Series 2020B-1 Subordinate Bonds,” and $______Tobacco Settlement Bonds (Gold Country Settlement Funding Corporation), Series 2020B-2 (Subordinate) (the “Series 2020B-2 Subordinate Bonds” and, collectively with the Series 2020A Senior Bonds and the Series 2020B- 1 Subordinate Bonds, the “Series 2020 Bonds”). The Series 2020 Bonds are being issued pursuant to an Amended and Restated Indenture and a Series 2020 Supplement (collectively, the “Indenture”), each dated as of ______1, 2020, by and between the Agency and The Bank of New York Mellon Trust Company, N.A., a national banking association, as indenture trustee (the “Indenture Trustee”).

SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Agency for the benefit of the Holders and Beneficial Owners of the Series 2020 Bonds and in order to assist the Participating Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5).

SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the Agency pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

“Beneficial Owner” shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Series 2020 Bonds (including persons holding Series 2020 Bonds through nominees, depositories or other intermediaries) or is treated as the owner of any Series 2020 Bonds for federal income tax purposes.

“Dissemination Agent” shall mean Digital Assurance Certification, L.L.C., or any successor Dissemination Agent designated in writing by the Agency and which has filed with the Agency a written acceptance of such designation.

“Financial Obligation” shall mean “financial obligation” as such term is defined in the Rule.

“Holder” shall mean the person in whose name any Series 2020 Bond shall be registered.

“Listed Events” shall mean any of the events listed in Section 5(a) or (b) of this Disclosure Certificate.

“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule.

“Participating Underwriters” shall mean any of the original underwriters of the Series 2020 Bonds required to comply with the Rule in connection with the offering of the Series 2020 Bonds.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

338 SECTION 3. Provision of Annual Reports.

(a) The Agency shall, or shall cause the Dissemination Agent to, not later than April 1 after the end of the Agency’s fiscal year (except as provided below), commencing with the report for the Agency’s fiscal year ending June 30, 2020, provide to the MSRB an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate; provided, that the audited financial statements of the Agency for the fiscal year covered by such Annual Report may be submitted separately from the balance of the Annual Report for such fiscal year and later than the date required above for the filing of the Annual Report if they are not available by that date, and shall be submitted when made available, no later than the end of the fiscal year immediately succeeding the fiscal year covered by such Annual Report. If the Agency’s fiscal year changes, it shall give notice of such change in a filing with the MSRB. The Annual Report shall be submitted on a standard form in use by industry participants or other appropriate form and shall identify the Series 2020 Bonds by name and CUSIP number. The Annual Report may cross-reference other information as provided in Section 4 of this Disclosure Certificate.

(b) Not later than 15 business days prior to said date, the Agency shall provide the Annual Report to the Dissemination Agent (if other than the Agency). If the Agency is unable to provide to the MSRB an Annual Report by the date required in subsection (a), the Agency shall, in a timely manner, send or cause to be sent notice of such failure to the MSRB.

(c) The Dissemination Agent shall (if the Dissemination Agent is other than the Agency) file a report with the Agency certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided to the MSRB.

SECTION 4. Content of Annual Reports. The Agency’s Annual Report shall contain or include by reference the following:

(1) audited financial statements of the Agency for the preceding fiscal year, prepared in accordance with generally accepted accounting principles in effect from time to time;

(2) based on Tobacco Settlement Revenues received in the preceding fiscal year, an update of the relevant calendar year information set forth in the Offering Circular under the heading “TOBACCO SETTLEMENT REVENUES PROJECTION METHODOLOGY AND BOND STRUCTURING ASSUMPTIONS” under the last column, “Total Annual Payments to Indenture Trustee,” in the table captioned “Projection of Tobacco Settlement Revenues to be Received by the Indenture Trustee”;

(3) based on Tobacco Settlement Revenues received in the preceding fiscal year, the calculation of the actual debt service coverage ratio for the relevant calendar year for the Series 2020A Senior Bonds determined in the manner set forth in the Offering Circular under the heading “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” in the table captioned “Series 2020A Senior Bonds Debt Service and Projected Debt Service Coverage”; and

(4) based on Tobacco Settlement Revenues received in the preceding fiscal year, the calculation of total actual debt service for the relevant calendar year for the Series 2020 Bonds determined in the manner set forth in the Offering Circular under the heading “TABLES OF PROJECTED BOND DEBT SERVICE AND COVERAGE” in the table captioned “Projected Series 2020 Bonds Debt Service Schedule Incorporating Turbo Redemptions of the Series 2020B Subordinate Bonds”.

Any or all of the items listed above may be set forth in one or a set of documents or may be included by specific reference to other documents, including official statements of debt issues of the Agency or related public entities, which have been made available to the public on the MSRB’s website. The Agency shall clearly identify each such other document so included by reference.

339 SECTION 5. Reporting of Significant Events.

(a) The Agency shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Series 2020 Bonds in a timely manner not later than ten business days after the occurrence of the event:

1. principal and interest payment delinquencies;

2. non-payment related defaults, if material;

3. unscheduled draws on debt service reserves reflecting financial difficulties of the Agency;

4. unscheduled draws on any credit enhancement reflecting financial difficulties of the Agency;

5. substitution of credit or liquidity providers or failure of a credit or liquidity provider to perform its obligations with respect to the Series 2020 Bonds;

6. adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Series 2020 Bonds, or other material events affecting the tax status of the Series 2020 Bonds;

7. modifications to rights of Holders of the Series 2020 Bonds, if material;

8. redemption or call of the Series 2020 Bonds, if material, and tender offers;

9. defeasances;

10. release, substitution or sale of property securing repayment of the Series 2020 Bonds, if material;

11. rating changes;

12. bankruptcy, insolvency, receivership or similar event of the Agency; provided that for the purposes of the events described in this clause, such an event is considered to occur upon: the appointment of a receiver, fiscal agent or similar officer for the Agency in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Agency, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Agency;

13. the consummation of a merger, consolidation, or acquisition involving the Agency or the sale of all or substantially all of the assets of the Agency, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material;

14. appointment of a successor or additional trustee or the change of name of the trustee, if material;

340 15. incurrence of a Financial Obligation of the Agency, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a Financial Obligation of the Agency, any of which affect security holders, if material; and

16. default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a Financial Obligation of the Agency, any of which reflect financial difficulties.

(b) Upon the occurrence of a Listed Event described in Section 5(a), the Agency shall within ten business days of occurrence file a notice of such occurrence with the MSRB. Notwithstanding the foregoing, notice of the Listed Event described in subsection (a)(8) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Series 2020 Bonds pursuant to the Indenture.

SECTION 6. Format for Filings with MSRB. Any report or filing with the MSRB pursuant to this Disclosure Certificate must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org.

SECTION 7. Termination of Reporting Obligation. The Agency’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Series 2020 Bonds. If such termination occurs prior to the final maturity of the Series 2020 Bonds, the Agency shall give notice of such termination in a filing with the MSRB.

SECTION 8. Dissemination Agent. The Agency may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Agency pursuant to this Disclosure Certificate. The initial Dissemination Agent shall be Digital Assurance Certification, L.L.C.

SECTION 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Agency may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a) or (b), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Series 2020 Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Series 2020 Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The amendment or waiver does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Series 2020 Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Certificate, the Agency shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Agency. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in a filing with the MSRB, and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

341 SECTION 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Agency from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice required to be filed pursuant to this Disclosure Certificate, in addition to that which is required by this Disclosure Certificate. If the Agency chooses to include any information in any Annual Report or notice in addition to that which is specifically required by this Disclosure Certificate, the Agency shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event or any other event required to be reported.

SECTION 11. Default. In the event of a failure of the Agency to comply with any provision of this Disclosure Certificate, any Holder or Beneficial Owner of the Series 2020 Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Agency to comply with its obligations under this Disclosure Certificate; provided, that any such action may be instituted only in Superior Court of the State of California in and for the County of Placer or in U.S. District Court in or nearest to the County of Placer. The sole remedy under this Disclosure Certificate in the event of any failure of the Agency to comply with this Disclosure Certificate shall be an action to compel performance.

SECTION 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Agency, the Dissemination Agent, the Participating Underwriters and Holders and Beneficial Owners from time to time of the Series 2020 Bonds, and shall create no rights in any other person or entity.

IN WITNESS WHEREOF, I have hereunto set my hand as of the date first written above.

THE CALIFORNIA COUNTY TOBACCO SECURITIZATION AGENCY

By: ______, Commissioner

342 THIS PAGE INTENTIONALLY LEFT BLANK

343 APPENDIX I

TABLE OF ACCRETED VALUES OF SERIES 2020B-2 SUBORDINATE BONDS*

(Accreted Values Shown Per $5,000 Maturity Amount)

Accretion Rate: ______%

Date Accreted Value ($) ______, 2020† [December 1, 2020] June 1, 2021 December 1, 2021 June 1, 2022 December 1, 2022 June 1, 2023 December 1, 2023 June 1, 2024 December 1, 2024 June 1, 2025 December 1, 2025 June 1, 2026 December 1, 2026 June 1, 2027 December 1, 2027 June 1, 2028 December 1, 2028 June 1, 2029 December 1, 2029 June 1, 2030 December 1, 2030 June 1, 2031 December 1, 2031 June 1, 2032 December 1, 2032 June 1, 2033 December 1, 2033 June 1, 2034 December 1, 2034 June 1, 2035 December 1, 2035 June 1, 2036 December 1, 2036 June 1, 2037 December 1, 2037 June 1, 2038 December 1, 2038 June 1, 2039 December 1, 2039 June 1, 2040 December 1, 2040

* Preliminary, subject to change.

† Closing Date.

344 Date Accreted Value ($) June 1, 2041 December 1, 2041 June 1, 2042 December 1, 2042 June 1, 2043 December 1, 2043 June 1, 2044 December 1, 2044 June 1, 2045 December 1, 2045 June 1, 2046 December 1, 2046 June 1, 2047 December 1, 2047 June 1, 2048 December 1, 2048 June 1, 2049 December 1, 2049 June 1, 2050 December 1, 2050 June 1, 2051 December 1, 2051 June 1, 2052 December 1, 2052 June 1, 2053 December 1, 2053 June 1, 2054 December 1, 2054 June 1, 2055

345 APPENDIX J

INDEX OF DEFINED TERMS

2016 and 2017 NPM Adjustments Settlement Commission ...... 19 Agreement ...... 37, 77 Commissioner ...... 19 2016-17 Settlement Signatory States ...... 38, 81 Complementary Legislation...... 76 2018-2022 NPM Adjustments Settlement Consent Decree ...... S-6, 90 Agreement ...... 37, 78 Continuing Disclosure Undertaking ...... S-16, 133 2018-2022 Settlement Signatory States ...... 39, 82 Corporation ...... S-1, 1 Accreted Value ...... 15 Corporation Tobacco Assets ...... S-4, 4 Accretion Rate ...... 14 County ...... S-1, 1 Act ...... 18 County Tobacco Assets ...... S-1, 1 Actual Operating Income ...... 66 CPI ...... 66 Actual Volume ...... 66 CPI-U ...... 30 Additional Bonds ...... S-15, 12 Current Interest Bond ...... 14 Adjusted SPM Market Share ...... 31 Data Clearinghouse...... 80 Affected Member ...... 19 Default Rate ...... 15 Agency ...... S-1, 1 Del Rio ...... 137 Allocable Share Release Amendment ...... 75 Department of Finance ...... S-8 Altria ...... 37, 93 Distribution Date ...... S-9, 3 Annual Payments ...... S-5 DOJ Case ...... 52, 122 ANPRM ...... 42, 107 DPA ...... 36 APA ...... 42, 113 DTC ...... S-3 Arbitration Panel...... 38, 77 e-cigarette ...... 45 ARIMOU ...... S-2, 2 electronic cigarette ...... 45 ARIMOU Amendment ...... 91 EMMA ...... S-16, 133 August 2017 Guidance ...... 108 Engle Progeny Cases ...... 52, 122 Authorized Denomination ...... 14 Escrow Agreement ...... 19 B&W ...... S-4, 2, 94 Escrow Statute ...... 73 Bankruptcy Code ...... 54 ETS ...... 51 Base Aggregate Participating Manufacturer E-Vapor Cases ...... 122 Market Share ...... 68 Event of Default...... S-14, 11 Base Operating Income ...... 66 Extraordinary Payments ...... S-11, 10 Base Share ...... 65 FCTC ...... 120 Base Volume ...... 66 FD&C Act ...... 105 BAT ...... S-4, 94 FDA ...... 41, 98 Bond Structuring Methodology and FET ...... 80 Assumptions ...... 29 Flight Attendant Cases ...... 122 Bonds ...... S-1, 1 Foundation ...... 72 California Escrow Agent ...... S-7, 91 FSPTCA ...... 41, 105 California Escrow Agreement ...... S-7 FTC ...... 53, 94 California Local Government Escrow Account .... S-7, General Tobacco ...... 55 91 Health Care Cost Recovery Cases ...... 122 California State Government Escrow Account S-7, 91 IHS Global ...... S-8 Cambridge Filter Method ...... 115 Imperial Tobacco ...... S-4, 94 Capital Appreciation Bond ...... 14 Income Adjustment...... 66 CBI ...... 95 Indenture ...... S-1, 1 CDC ...... 41 Indenture Trustee ...... S-1, 1 CDTFA ...... 87 Indian Country ...... 89 Cigarette ...... 65 Individual Smoking and Health Cases ...... 121 Class Action Cases ...... 122 Inflation Adjustment ...... 66 Closing Date ...... S-3 Initial Payments ...... S-5 Collateral ...... S-3, 4 Joint Powers Agreement ...... 18 Collections ...... S-14 JPMDL ...... 126

346 Junior Bonds ...... S-15, 12 Previously Settled States ...... 61 Liggett ...... 95 Previously Settled States Reduction ...... 67 Liquidity Reserve Accounts ...... S-13, 5 Pro Rata ...... 9 Liquidity Reserve Requirements ...... S-13, 5 Projected Turbo Redemptions ...... S-10, 16 Litigating Releasing Parties Offset ...... 69 PSS Credit Amendment ...... 36, 67 Loan Payments ...... S-2, 1 Qualifying Statute ...... 73 Lorillard ...... S-4, 2, 94 Record Date ...... 14 Lump Sum Payment ...... S-11, 7 Relative Market Share ...... 65 March 2019 Draft Guidance ...... 111 Released Parties ...... 63 Market Share ...... S-6, 70 Released Party ...... 63 Maturity Date ...... 14 Releasing Parties...... 63 Maximum Annual Senior Debt Service ...... S-13, 5 Residual Certificate ...... 8 Member...... S-2, 1 Residual Trust ...... 8 Middleton ...... 110 Reynolds American ...... S-4, 94 Model Statute ...... 74 Reynolds Tobacco ...... S-4, 2, 94 MOU ...... S-2, 2 RICO ...... 51 MRTP ...... 103 Rule ...... S-16, 133 MSA ...... S-1, 2 S&P ...... S-16, 57, 135 MSA Auditor ...... 38, 64 Santa Fe Natural Tobacco Company ...... 94 MSA Escrow Agent ...... S-6, 64 SEC ...... 35 MSA Escrow Agreement ...... 64 Section V.B Adjustment ...... 38, 81 MSAI ...... S-7, 65 Senior Bonds ...... S-11, 5 NAAG ...... S-7 Senior Liquidity Reserve Account ...... S-13, 5 NAFTA ...... 50 Senior Liquidity Reserve Requirement ...... S-13, 5 National Escrow Agreement ...... S-6 Senior Payment Default ...... 9 New Product Application Process ...... 105 Series 2006 Bonds ...... S-1, 1 NIH ...... 114 Series 2020 Bonds ...... S-1, 1 Non-Compliant NPM Cigarettes ...... 79 Series 2020A Senior Bonds ...... S-1, 1 non-contested states ...... 77 Series 2020B Subordinate Bonds ...... S-1, 1 Non-Participating Manufacturers ...... S-5, 2 Series 2020B-1 Subordinate Bonds ...... S-1, 1 Non-Released Parties ...... 69 Series 2020B-2 Subordinate Bonds ...... S-1, 1 Non-SET-Paid NPM Sales ...... 80 SET ...... 79 NPM Adjustment ...... S-5, 2, 37, 67 SET-Paid NPM Percentage...... 80 NPM Adjustment Settlement ...... 38, 78 SET-Paid NPM Sales ...... 79 NPM Adjustment Settlement Agreement ...... 37, 77 Settling States ...... S-4, 2 NPM Adjustment Settlement Non-Signatories .. 40, 78 Sinking Fund Installments ...... 15 NPM Adjustment Settlement Signatories ...... 38, 78 SLATI ...... 116 NPM Adjustment Settlement Term Sheet...... 37, 77 SPMs ...... S-5, 2, 61 NPM Adjustment Stipulated Partial Settlement State ...... S-1, 1 and Award ...... 38, 78 State Settlement Agreements ...... 53 NPMs ...... S-5, 2, 37 Strategic Contribution Payments ...... S-5 Offset for Claims-Over ...... 69 Subordinate Bonds ...... S-12, S-13, 5 Offset for Miscalculated or Disputed Payments ...... 69 Subordinate Liquidity Reserve Account ...... S-13, 5 Operating Cap ...... 7 Subordinate Liquidity Reserve Requirement ... S-13, 5 OPMs ...... S-4, 2 Subordinate Payment Default ...... S-11, 9 Original Participating Manufacturers ...... S-4, 2 Subsequent Participating Manufacturers ...... S-5, 2 Owners ...... 14 Term Bond Maturity ...... 18 Participating Jurisdictions ...... S-6, 2 Tobacco Consumption Forecast ...... 131 Participating Manufacturers...... S-5, 2 Tobacco Consumption Report ...... S-8 Philip Morris ...... S-4, 2, 93 Tobacco Products ...... 72 Pledged Accounts ...... 4 Tobacco Settlement Revenues ...... S-4, 4 PMs ...... S-2, S-5, 2, 61 Tobacco Settlement Revenues Projection PMTA ...... 108 Methodology and Assumptions ...... 29 Population Forecast ...... S-8, 29 Total Lump Sum Payment ...... S-11, 7 Preliminary Evaluation ...... 107 TPSAC ...... 43, 105 Previously Settled State Settlements...... 53 Tribe ...... 89

347 Trust Agreement ...... 8 units sold ...... 85 Turbo Available Collections ...... 8 UST ...... 94 Turbo Redemption ...... S-9, 15 Vector Group Ltd...... 95 Turbo Term Bond Maturity ...... 18 Verification Agent ...... 136 UMSRC ...... 100 Volume Adjustment ...... 66 Underwriter ...... 136 West Virginia Cases ...... 126 United States ...... 65

348